EXHIBIT 13
----------
Consolidated Balance Sheet
- ----------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
December 31,
-----------------------
2002 2001
- -----------------------------------------------------------------------------
Assets
Cash and due from banks $ 80,101 $ 81,563
Due from banks - interest bearing 984 712
Federal funds sold --- ---
Securities:
Held to maturity (fair values of $514,735 and
$242,558, respectively) 499,161 240,953
Available for sale carried at fair value 694,735 517,517
----------------------
Total securities 1,193,896 758,470
----------------------
Loans, net of unearned income 1,820,885 1,539,695
Allowance for loan losses (25,080) (20,786)
----------------------
Net loans 1,795,805 1,518,909
----------------------
Premises and equipment 55,725 50,252
Accrued interest receivable 20,024 16,290
Goodwill and other intangible assets 58,830 18,878
Other assets 91,866 29,380
----------------------
Total Assets $3,297,231 $2,474,454
======================
Liabilities
Deposits:
Non-interest bearing demand $ 301,262 $ 244,422
Interest bearing demand 276,131 245,447
Money market 508,062 406,727
Savings deposits 357,290 252,438
Certificates of deposit 957,211 764,424
----------------------
Total deposits 2,399,956 1,913,458
----------------------
Federal Home Loan Bank borrowings 343,324 106,889
Other borrowings 175,634 172,242
Accrued interest payable 7,939 7,313
Other liabilities 32,557 16,351
Company obligated mandatory redeemable capital
securities of subsidiary trusts holding solely
debentures of the Corporation 12,650 ---
----------------------
Total Liabilities 2,972,060 2,216,253
----------------------
Shareholders' Equity
Preferred stock, no par value; 1,000,000 shares
authorized; none outstanding --- ---
Common stock ($2.0833 par value; 50,000,000 shares
authorized; 21,319,348 and 20,996,531 shares
issued, respectively) 44,415 43,742
Capital surplus 52,855 58,663
Retained earnings 246,148 230,924
Treasury stock (857,603 and 3,142,034 shares,
respectively, at cost) (20,482) (76,183)
Accumulated other comprehensive income 4,305 3,560
Deferred benefits for directors and employees (2,070) (2,505)
----------------------
Total Shareholders' Equity 325,171 258,201
----------------------
Total Liabilities and Shareholders' Equity $3,297,231 $2,474,454
============================================================================
See Notes to Consolidated Financial Statements.
E - 2
Consolidated Statement of Income
- ----------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
For the years ended December 31,
---------------------------------
2002 2001 2000
- -----------------------------------------------------------------------------
Interest Income
Loans, including fees $124,912 $126,230 $128,591
Securities:
Taxable 34,670 25,692 24,297
Tax-exempt 15,969 10,330 8,974
--------------------------------
Total interest on securities 50,639 36,022 33,271
--------------------------------
Federal funds sold 604 1,687 1,217
--------------------------------
Total interest income 176,155 163,939 163,079
--------------------------------
Interest Expense
Interest bearing demand deposits 1,685 3,920 5,026
Money market deposits 12,890 14,006 16,462
Savings deposits 3,852 4,671 5,264
Certificates of deposit 38,481 43,632 43,689
--------------------------------
Total interest on deposits 56,908 66,229 70,441
Federal Home Loan Bank borrowings 11,879 4,497 1,946
Other borrowings 3,768 5,628 7,165
--------------------------------
Total interest expense 72,555 76,354 79,552
--------------------------------
Net Interest Income 103,600 87,585 83,527
Provision for loan losses 9,359 5,995 3,225
--------------------------------
Net interest income after provision
for loan losses 94,241 81,590 80,302
--------------------------------
Non-Interest Income
Trust fees 11,526 11,504 12,226
Service charges on deposits 10,818 9,182 8,097
Other income 3,617 2,596 2,243
Net securities gains 1,891 1,306 810
--------------------------------
Total non-interest income 27,852 24,588 23,376
--------------------------------
Non-Interest Expense
Salaries and wages 31,329 27,926 28,217
Employee benefits 7,894 5,915 5,092
Net occupancy 5,012 3,998 3,844
Equipment 6,854 5,913 6,439
Other operating 23,043 20,907 20,891
Merger-related expenses 2,515 235 ---
--------------------------------
Total non-interest expense 76,647 64,894 64,483
--------------------------------
Income before provision for income taxes 45,446 41,284 39,195
Provision for income taxes 10,620 12,282 12,271
--------------------------------
Net Income $ 34,826 $ 29,002 $ 26,924
================================
Earnings per share $1.70 $1.60 $1.41
Average shares outstanding 20,459,122 18,123,851 19,092,927
Dividends per share $0.935 $0.92 $0.895
=============================================================================
See Notes to Consolidated Financial Statements.
E - 3
Consolidated Statement of Changes in Shareholders' Equity
- -----------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
For the years ended December 31, 2002, 2001, and 2000
--------------------------------------------------------------------------------------------
Accumulated Deferred
Common Stock Other Benefits for
-------------------- Capital Retained Treasury Comprehensive Directors &
Shares Amount Surplus Earnings Stock Income Employees Total
=============================================================================================================================
January 1, 2000 19,789,925 $43,742 $60,133 $208,508 $(34,311) $(7,456) $ (952) $269,664
--------------------------------------------------------------------------------------------
Net income 26,924 26,924
Change in accumulated
other comprehensive income 7,091 7,091
---------
Comprehensive income 34,015
Cash dividends:
Common ($.895 per share) (16,893) (16,893)
Treasury shares purchased - net (1,221,985) (669) (27,698) (28,367)
Payment on ESOP debt 350 350
Deferred benefits for
directors - net (263) (263)
--------------------------------------------------------------------------------------------
December 31, 2000 18,567,940 43,742 59,464 218,539 (62,009) (365) (865) 258,506
--------------------------------------------------------------------------------------------
Net income 29,002 29,002
Change in accumulated
other comprehensive income 3,925 3,925
---------
Comprehensive income 32,927
Cash dividends:
Common ($.92 per share) (16,617) (16,617)
Treasury shares purchased - net (713,443) (801) (14,174) (14,975)
Borrowings on ESOP debt - net (1,572) (1,572)
Deferred benefits for
directors - net (68) (68)
--------------------------------------------------------------------------------------------
December 31, 2001 17,854,497 43,742 58,663 230,924 (76,183) 3,560 (2,505) 258,201
--------------------------------------------------------------------------------------------
Net income 34,826 34,826
Change in accumulated
other comprehensive income 745 745
---------
Comprehensive income 35,571
Cash dividends:
Common ($.935 per share) (19,602) (19,602)
Treasury shares purchased - net (834,640) (170) (19,787) (19,957)
Shares issued for acquisition 3,441,888 673 (5,638) 75,488 70,523
Payment on ESOP debt 543 543
Deferred benefits for
directors - net (108) (108)
--------------------------------------------------------------------------------------------
December 31, 2002 20,461,745 $44,415 $52,855 $246,148 $(20,482) $ 4,305 $(2,070) $325,171
=============================================================================================================================
There was no activity in Preferred Stock during the years ended
December 31, 2002, 2001 and 2000.
See Notes to Consolidated Financial Statements.
E - 4
Consolidated Statement of Cash Flows
- -----------------------------------------------------------------------------
(in thousands)
For the years ended December 31,
--------------------------------
Increase (Decrease) in Cash and Cash Equivalents 2002 2001 2000
====================================================================================
Cash Flows from Operating Activities:
Net Income $ 34,826 $ 29,002 $ 26,924
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 5,671 4,919 5,229
Net (accretion) and amortization (394) (472) 371
Provision for loan losses 9,359 5,995 3,225
Gains on sales of securities - net (1,891) (1,306) (810)
Gains on sales of loans - net (535) (594) (195)
Deferred income taxes 391 (232) (70)
Loans originated for sale (54,826) (63,613) (40,301)
Proceeds from the sale of loans
originated for sale 56,159 61,616 47,858
Other - net 575 (1,390) 395
Net change in:
Interest receivable / payable (1,268) (1,690) 2,209
Other assets and other liabilities (638) 1,862 1,021
---------------------------------
Net cash provided by operating activities 47,429 34,097 45,856
---------------------------------
Cash flows from investing activities:
Securities held to maturity:
Proceeds from maturities and calls 117,683 29,502 28,408
Payments for purchases (268,094) (74,121) (11,436)
Securities available for sale:
Proceeds from sales 274,067 65,014 65,246
Proceeds from maturities and calls 134,852 170,328 50,598
Payments for purchases (405,774) (393,312) (99,115)
Acquisition, net of cash 24,464 --- ---
(Increase) decrease in loans 58,351 48,359 (77,565)
Purchases of premises and equipment - net (4,138) (2,207) (2,220)
Purchase of bank owned life insurance (40,000) --- (4,400)
---------------------------------
Net cash used in investing activities (108,589) (156,437) (50,484)
---------------------------------
Cash flows from financing activities:
Increase in deposits 18,621 43,097 56,360
Increase (decrease) in FHLB borrowings 77,911 73,177 (649)
Increase (decrease) in other borrowings 2,303 46,637 (13,487)
Dividends paid (18,890) (16,737) (17,167)
Treasury shares purchased - net (19,957) (14,975) (28,367)
Other (18) --- ---
---------------------------------
Net cash provided by (used in) financing activities 59,970 131,199 (3,310)
---------------------------------
Net increase (decrease) in cash and cash equivalents (1,190) 8,859 (7,938)
Cash and cash equivalents at beginning of year 82,275 73,416 81,354
---------------------------------
Cash and cash equivalents at end of year $ 81,085 $ 82,275 $ 73,416
=================================
Supplemental Disclosures:
Interest paid on deposits and other borrowings $ 74,524 $ 77,479 $ 77,279
Income taxes paid 11,425 12,736 12,410
Summary of business acquisition:
Fair value of assets acquired $ 684,389 --- ---
Stock issued for the purchase of American
Bancorporation common stock (70,523) --- ---
Fair value of liabilities assumed (644,509) --- ---
---------------------------------
Goodwill recognized $ (30,643) --- ---
====================================================================================
See Notes to Consolidated Financial Statements.
E - 5
Notes to Consolidated Financial Statements
- --------------------------------------------------------------
Note 1: Accounting Policies
WesBanco, Inc. ("WesBanco") is a bank holding company
offering a full range of financial services, including
trust and investment services, mortgage banking, insurance
and brokerage services, through offices located in West
Virginia, Central and Eastern Ohio, and Western
Pennsylvania. WesBanco's defined business segments are
community banking and trust and investment services.
The significant accounting principles employed in the
preparation of the accompanying Consolidated Financial
Statements are summarized below:
Principles of consolidation: The Consolidated Financial
Statements of WesBanco include the accounts of WesBanco and
its wholly-owned subsidiaries. Intercompany transactions
and accounts have been eliminated.
Business combinations: In June of 2001, the Financial
Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standard ("SFAS") No. 141, "Business
Combinations". Business combinations initiated after June
30, 2001 are required to be accounted for by the purchase
method. Under the purchase method, net assets of the
business acquired are recorded at their estimated fair
values as of the date of acquisition with any excess of the
cost of the acquisition over the fair value of the net
tangible and intangible assets acquired recorded as
goodwill. Results of operations of the acquired business
are included in the income statement from the date of
acquisition.
Reclassification: Certain prior year financial information
has been reclassified to conform to the presentation in
2002. The reclassifications had no effect on net income.
Use of estimates: The preparation of financial statements
in conformity with accounting principles generally accepted
in the United States requires management to make estimates
and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual
results could differ from those estimates.
Cash and cash equivalents: For the purpose of reporting
cash flows, cash and cash equivalents include cash and due
from banks and federal funds sold. Generally, federal
funds are sold for one day periods.
Securities:
Securities Available for Trading: Securities held
principally for resale in the near term are carried at fair
value, with unrealized gains (losses) reflected in current
operating results. WesBanco did not have a trading
portfolio during the two years ended December 31, 2002.
Securities Held to Maturity: Securities consisting
principally of debt securities, which are purchased with
the positive intent and ability to hold until their
maturity, are stated at cost, adjusted for amortization of
premiums and accretion of discounts.
Securities Available for Sale: Debt securities not
classified as trading or held to maturity, and marketable
equity securities not classified as trading, are classified
as available for sale. These securities may be sold at any
time based upon management's assessment of changes in
economic or financial market conditions, interest rate or
prepayment risks, liquidity considerations and other
factors. These securities are stated at fair value, with
the fair value adjustment, net of tax, reported as a
separate component of accumulated other comprehensive
income.
Gains and Losses: Net realized gains and losses on sales of
securities are included in non-interest income. The cost
of these securities sold is based on the specific
identification method. The gain or loss is determined as
of the trade date. Prior unrealized gains (losses) are
recorded through other comprehensive income and reversed
when gains or losses are realized or an impairment charge
is recorded. Other-than-temporary impairment charges on
securities held to maturity and securities available for
sale are recognized in securities gains and losses on the
income statement.
Other-Than-Temporary Impairment Losses: Declines in the
fair value of investment securities below cost are
evaluated for other-than-temporary impairment losses on a
quarterly basis. Impairment losses for declines in value of
fixed maturity investments and equity securities below cost
attributable to issuer-specific events are based upon all
relevant facts and circumstances for each investment and
are recognized when appropriate in accordance with Staff
Accounting Bulletin 59, SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" and
related guidance. For fixed maturity investments with
unrealized losses due to market conditions or industry-
related events where WesBanco has the positive intent and
ability to hold the investment for a period of time
sufficient to allow a market recovery, declines in value
below cost are not assumed to be other-than-temporary.
Amortization and Accretion: Amortization of premiums and
accretion of discounts are included in interest on
securities on a constant yield basis.
Loans and loans held for sale: Interest is accrued as
earned on loans except where doubt exists as to
collectability, in which case recognition of income is
discontinued. Loans originated and intended for sale in the
secondary market are carried at the lower of cost or
estimated market value in the aggregate.
E - 6
Note 1: Accounting Policies (continued)
A loan is considered impaired, based on current
information and events, if it is probable that WesBanco
will be unable to collect the scheduled payments of
principal and interest when due according to the
contractual terms of the loan agreement. Impaired loans
include all non-accrual and renegotiated loans, as well as
certain loans internally classified as substandard or
doubtful (as those terms are defined by banking
regulations) that meet the definition of impaired loans.
WesBanco generally recognizes interest income on non-
accrual loans on the cash basis after recovery of principal
is reasonably assured. Certain consumer loans are not
placed on non-accrual, and instead are charged down to the
net realizable value at 120 days past due for closed-end
loans and 180 days past due for open-end revolving lines of
credit. When repossession of collateral on secured consumer
loans is assured and in process, the charged down balance
is reclassified to other assets. Residential real estate
loans are generally not placed on non-accrual, and instead
are charged down to the net realizable value of the
collateral at 180 days past due.
Loan origination fees and certain direct costs are
deferred and amortized into interest income or expense, as
an adjustment to the yield, over the life of the loan using
the level yield method. When a loan is paid off, the
unamortized net origination fees are immediately recognized
into income or expense.
Allowance for loan losses: The allowance for loan losses is
maintained at a level considered adequate by management.
The allowance is increased by provisions charged to
operating expense and reduced by loan losses, net of
recoveries. Management's determination of the adequacy of
the allowance is based on evaluation of the loan portfolio,
as well as prevailing economic conditions, past loan loss
experience, current delinquency factors, changes in the
character of the loan portfolio, specific problem loans and
other relevant factors. This evaluation is inherently
subjective as it requires material estimates that may be
susceptible to significant change. While management has
allocated the allowance to different loan categories, the
allowance is general in nature and is available for the
loan portfolio in its entirety.
Premises and equipment: Premises and equipment are stated
at cost less accumulated depreciation, and depreciated over
their estimated useful lives using either the straight-line
or an accelerated method. Useful lives are revised when a
change in life expectancy becomes apparent. Maintenance and
repairs are charged to expense and betterments are
capitalized. Gains and losses on premises and equipment
retired or otherwise disposed of are charged to expense
when incurred.
Other real estate owned and repossessed assets: Other real
estate owned and repossessed assets, which are reported in
other assets, are carried at the lower of cost or their
estimated current fair value, less estimated costs to sell.
Other real estate owned consists primarily of properties
acquired through, or in lieu of, loan foreclosures. Other
real estate owned also includes bank premises held for
sale. Repossessed assets consist primarily of automobiles
acquired to satisfy defaulted consumer loans. Subsequent
declines in fair value, if any, and gains or losses on the
disposition of these assets, are charged to current
operations.
Goodwill and other intangible assets: Goodwill represents
the excess of the purchase price over net identifiable
tangible and intangible assets acquired in a purchase
business combination. Other intangible assets represent
purchased assets that have no physical property but
represent some future economic benefit to its owner and are
capable of being sold or exchanged on their own or in
combination with a related asset or liability. On January
1, 2002, WesBanco adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." Under the provisions of SFAS No. 142,
goodwill is no longer amortized into the income statement
over an estimated life, but rather is tested at least
annually for impairment. Intangible assets, which have
finite lives, continue to be amortized over their estimated
useful lives and also continue to be subject to impairment
testing. WesBanco's other intangible assets have finite
lives and are amortized on a declining balance basis over
an average life not exceeding 10 years. Prior to the
adoption of SFAS No. 142, WesBanco's goodwill was amortized
on a straight-line basis over varying periods not exceeding
20 years.
Derivatives: Interest rate swap agreements generally
involve the exchange of fixed and floating rate interest
payments without the exchange of the underlying notional
amount, on which interest payments are calculated. SFAS No.
133, "Accounting for Derivative Instruments and Hedging
Activities," requires companies to recognize all of their
derivative instruments as either assets or liabilities in
the statement of financial position at fair value. The
accounting for changes in the fair value (i.e., gains or
losses) of a derivative instrument depends on whether it
has been designated and qualifies as part of a hedging
relationship and further, on the type of hedging
relationship. For those derivative instruments that are
designated and qualify as hedging instruments, a company
must designate the hedging instrument, based upon the
exposure being hedged, as either a fair value hedge or cash
flow hedge. Currently, all of WesBanco's hedges have been
designated as cash flow hedges. For derivative instruments
that are designated and qualify as cash flow hedges (i.e.,
hedging the exposure to variability in expected future cash
flows that is attributable to a particular risk), the
effective portion of the gain or loss on the derivative
instrument is reported as a component of accumulated other
comprehensive income and reclassified into earnings in the
same period or periods during which the hedged transaction
affects earnings. Net interest
E - 7
received or interest paid on the effective portion of the
interest rate swaps is reported as a component of interest
income or expense in the Consolidated Statement of Income.
Income taxes: WesBanco and its subsidiaries file a
consolidated federal income tax return. The provision for
income taxes included in the consolidated statements of
income includes both federal and state income taxes and is
based on income in the financial statements, rather than
amounts reported on WesBanco's income tax returns.
Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is
recognized as income or expense in the period that includes
the enactment date.
Earnings per share: Basic earnings per share is calculated
by dividing net income by the weighted average number of
shares of common stock outstanding during each period. For
diluted earnings per share, the weighted average number of
shares for each period is increased by the number of shares
which would be issued assuming the exercise of common stock
options. There was no dilutive effect from the stock
options and accordingly, basic and diluted earnings per
share are the same.
Trust assets: Assets held by the subsidiary bank in
fiduciary or agency capacities for their customers are not
included as assets in the accompanying Consolidated Balance
Sheet. Certain trust assets are held on deposit at the
subsidiary bank.
Comprehensive income: Sources of comprehensive income not
included in net income consist of unrealized gains and
losses (net fair value adjustments) on securities available
for sale and derivatives, and additional minimum pension
liability, net of tax.
New accounting standards: In July 2001, the FASB issued
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized but instead
tested for impairment at least annually in accordance with
the provisions of SFAS No. 142. SFAS No. 142 also requires
that intangible assets with finite useful lives be
amortized over their respective estimated useful lives to
their estimated residual values and reviewed for impairment
in accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets."
In August 2001, the FASB issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived
Assets". This statement addresses financial accounting and
reporting for the impairment or disposal of long-lived
assets, and how and when to measure impairment on long-
lived assets and how to account for long-lived assets that
an entity plans to dispose of either through sale,
abandonment, exchange, or distribution. This statement
supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to Be Disposed".
SFAS No. 144 is effective for fiscal years beginning after
December 15, 2001. Management has evaluated the impact of
this statement and has determined that there is no material
effect on WesBanco's financial position or results of
operations.
In June 2002, the FASB issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal
Activities", which establishes financial accounting and
reporting for costs associated with exit or disposal
activities such as a sale or termination of a business
line, the closure of business activities in a particular
location, or a change in management structure, to be
recorded as a liability at fair value when it becomes
probable the cost will be incurred and no future economic
benefit will be gained by the company for such cost.
Applicable costs include employee termination benefits,
contract termination costs, and costs to consolidate
facilities or relocate employees. SFAS No. 146 supersedes
EITF Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an
Activity," which in some cases required certain costs to be
recognized before a liability was actually incurred. This
statement is effective for disposal activities initiated
after December 31, 2002. Management has evaluated the
impact of this statement and has determined that there is
no material effect on WesBanco's financial position or
results of operations.
In October 2002, the FASB issued SFAS No. 147,
"Acquisition of Certain Financial Institutions", which
clarifies FASB No. 142. SFAS No. 147 became effective upon
issuance and requires companies to cease amortization of
unidentified intangible assets associated with certain
branch acquisitions and reclassify these assets to
goodwill. SFAS No. 147 also modifies SFAS No. 144 to
include in its scope long-term customer-relationship
intangible assets and thus subject those intangible assets
to the same undiscounted cash flow recoverability test and
impairment loss recognition and measurement provisions
required for other long-lived assets. Management has
evaluated the impact of this statement and has determined
that there is no material effect on WesBanco's financial
position or results of operations.
In December 2002, the FASB issued SFAS No.148,
"Accounting for Stock-Based Compensation - Transition and
Disclosure," which provides guidance on how to transition
from the intrinsic value method of accounting for stock-
based employee compensation under APB 25 to SFAS No. 123's
fair value method of accounting, if a company so elects.
Certain provisions of this statement are effective for
fiscal years ending after December 15, 2002.
E - 8
Note 1: Accounting Policies (continued)
The following table illustrates the effect on net income
and earnings per share if the fair value method has been
applied to all outstanding and unvested awards in each
period:
For the years ended December 31,
--------------------------------
(dollars in thousands, except per share amounts) 2002 2001 2000
=============================================================================
Net income as reported $34,826 $29,002 $26,924
Less: Stock based compensation expense under
fair value based method - net of tax* 581 391 103
-------------------------
Pro forma net income $34,245 $28,611 $26,821
=========================
Pro forma earnings per share $1.67 $1.58 $1.40
=============================================================================
* Assumes expense is amortized over a three year vesting period.
The following table sets forth the significant assumptions
used in calculating the fair value of the grants under the
Black-Scholes option pricing model:
For the years ended December 31,
--------------------------------
2002 2001 2000
=============================================================================
Weighted-average life 6 Years 10 Years 10 Years
Risk free interest rates 3.22% 5.49% 6.22%
Dividend yield 4.02 --- ---
Volatility factors 28.77 23.40 21.62
Fair value of the grants $4.83 $10.25 $11.24
=============================================================================
WesBanco is currently evaluating the alternative
methods under this pronouncement and has not determined the
effect, if any, on its consolidated results of operations,
financial position, or cash flows.
Note 2: Completed Business Combination
WesBanco completed the acquisition of American
Bancorporation on March 1, 2002. The acquisition was
accounted for using the purchase method of accounting.
Under the terms of the definitive Agreement and Plan of
Merger, WesBanco exchanged 1.1 shares of WesBanco common
stock for each share of American common stock outstanding
based on a fixed exchange ratio. WesBanco issued 3,441,888
shares of common stock valued at $70.5 million. Of the
total shares issued in the transaction, 3,119,071 shares
were issued from treasury shares and the remaining shares
from authorized, but previously unissued shares. As of the
acquisition date, American had total assets of
approximately $678 million, deposits of $466 million and
shareholders' equity of $44 million.
Total goodwill and core deposit intangibles recognized
in 2002 as the result of this transaction were $30.6
million and $11.1 million, respectively. Goodwill and core
deposit intangibles were allocated to WesBanco's community
banking segment. Under the new accounting standards, SFAS
No. 141, "Business Combinations" and SFAS No. 142,
"Goodwill and Other Intangible Assets", a core deposit
intangible is separated from goodwill and amortized over
its remaining useful life. Amortization of the American
core deposit intangible has a weighted average remaining
useful life of 8 years. The remaining goodwill intangible
is not subject to amortization but will be evaluated
annually for possible impairment.
The following table represents pro forma combined results
of operations of WesBanco and American as if the business
combination had been completed as of the beginning of each
respective period:
For the years ended December 31,
--------------------------------
(in thousands, except per share amounts) 2002 2001 2000
=============================================================================
Net interest income $107,093 $107,604 $106,112
Net Income 34,829 33,489 33,046
Earnings per share 1.66 1.55 1.47
=============================================================================
In 2002, WesBanco recorded merger-related expenses
totaling $2.5 million, all relating to the American
acquisition. Included in the total were $1.7 million in
severance payments, $0.4 million in data conversion and
equipment expense, $0.2 million in marketing expenses and
$0.2 million in other merger-related expenses, all of which
were accrued and paid during 2002.
E - 9
Note 3: Securities
The following tables summarize amortized cost and fair
values of held to maturity and available for sale securities:
Held to Maturity
------------------------------------------------------------------------------------------
December 31, 2002 December 31, 2001
--------------------------------------------- -------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value Cost Gains Losses Value
================================================================================================================
U.S. Treasury and
Federal Agency
securities $ 86,144 $ 1,511 --- $ 87,655 $ 1,001 $ 17 --- $ 1,018
Obligations of
states and political
subdivisions 382,752 14,224 $(161) 396,815 221,866 2,839 $(1,251) 223,454
Other debt securities 30,265 --- --- 30,265 18,086 --- --- 18,086
------------------------------------------------------------------------------------------
Total $ 499,161 $ 15,735 $(161) $514,735 $240,953 $2,856 $(1,251) $242,558
================================================================================================================
Available for Sale
------------------------------------------------------------------------------------------
December 31, 2002 December 31, 2001
--------------------------------------------- -------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value Cost Gains Losses Value
================================================================================================================
U.S. Treasury and
Federal Agency
securities $ 354,487 $ 8,207 --- $362,694 $300,948 $6,617 $ (315) $307,250
Obligations of
states and political
subdivisions 7,951 249 $ (48) 8,152 11,905 239 (68) 12,076
Mortgage-backed &
other debt securities 309,830 8,111 (50) 317,891 191,511 1,820 (398) 192,933
------------------------------------------------------------------------------------------
Total debt securities 672,268 16,567 (98) 688,737 504,364 8,676 (781) 512,259
Equity securities 5,322 730 (54) 5,998 5,740 499 (981) 5,258
------------------------------------------------------------------------------------------
Total $ 677,590 $ 17,297 $(152) $694,735 $510,104 $9,175 $(1,762) $517,517
================================================================================================================
The following table summarizes amortized cost and estimated
fair value of securities by maturity:
December 31, 2002
----------------------------------------------
Held to Maturity Available for Sale
--------------------- ---------------------
Estimated Estimated
Amortized Fair Amortized Fair
(in thousands) Cost Value Cost Value
=============================================================================
Within one year $ 43,058 $ 43,615 $ 80,795 $ 81,400
After one year, but within five 114,823 118,802 333,138 341,257
After five years, but within ten 136,812 142,620 253,578 261,221
After ten years 204,468 209,698 10,079 10,857
---------------------------------------------
Total $ 499,161 $ 514,735 $ 677,590 $ 694,735
=============================================================================
Mortgage-backed securities are assigned to maturity categories based on
estimated average lives. Available for sale securities in the after ten year
category include securities with no stated maturity. Other securities with
prepayment or call provisions are categorized based on contractual maturity.
Securities with par values aggregating $374.9 million
and $356.2 million at December 31, 2002 and 2001,
respectively, were pledged to secure public and trust
funds. Gross security gains of $3.2 million, $1.3 million
and $0.8 million and gross security losses of $1.3 million,
$25 thousand and $39 thousand were realized for the years
ended December 31, 2002, 2001 and 2000, respectively.
E - 10
Note 4: Loans and the Allowance for Loan Losses
The following table is a summary of total loans:
December 31,
------------------------
(in thousands) 2002 2001
=======================================================================
Commercial $ 306,071 $ 271,269
Commercial real estate 504,902 342,337
Residential real estate 569,095 501,916
Home equity lines of credit 117,964 98,400
Consumer 318,129 320,251
-----------------------
Total portfolio loans 1,816,161 1,534,173
Loans held for sale 4,724 5,522
-----------------------
Loans, net of unearned income $1,820,885 $1,539,695
=======================================================================
The following table represents changes in the allowance for loan losses:
For the years ended December 31,
--------------------------------
(in thousands) 2002 2001 2000
=============================================================================
Balance, beginning of year $20,786 $20,030 $19,752
Allowance for loan losses of acquired bank 3,903 --- ---
Provision for loan losses 9,359 5,995 3,225
Charge-offs (9,716) (5,838) (4,095)
Recoveries 748 599 1,148
-----------------------------
Net charge-offs (8,968) (5,239) (2,947)
-----------------------------
Balance, end of year $25,080 $20,786 $20,030
=============================================================================
The following tables summarize loans classified as impaired:
December 31,
------------------
(in thousands) 2002 2001
=============================================================================
Non-accrual $ 7,480 $ 4,030
Renegotiated 2,646 3,756
Other impaired loans 11,249 6,355
-----------------
Total impaired loans $21,375 $14,141
=================
Impaired loans with a related allowance for loan losses $16,343 $12,813
Allowance for loan losses allocated to impaired loans 4,675 4,878
=============================================================================
For the years ended December 31,
--------------------------------
(in thousands) 2002 2001 2000
==============================================================================
Average impaired loans $19,908 $13,572 $14,466
Amount of contractual interest income on impaired loans 574 392 306
Amount of interest income recognized on a cash basis 357 339 179
==============================================================================
Most lending occurs with customers located within West
Virginia, Central and Eastern Ohio and Western
Pennsylvania. No significant concentration of credit risk
exists by industry or by individual borrower. WesBanco has
no significant exposure on any foreign loans.
Note 5: Premises and Equipment
Premises and equipment include:
December 31,
Estimated ------------------------
(in thousands) useful life 2002 2001
========================================================================
Land and improvements (3-10 years) $ 15,163 $ 12,735
Buildings and improvements (4-50 years) 52,564 53,216
Furniture and equipment (2-25 years) 27,224 42,716
------------------------
Total Cost 94,951 108,667
Less - accumulated depreciation (39,226) (58,415)
------------------------
Total premises and equipment $ 55,725 $ 50,252
========================================================================
Depreciation and amortization expense of premises and
equipment charged to operations for the years ended
December 31, 2002, 2001, and 2000 was $5.7 million, $4.9
million and $5.2 million, respectively. The decrease in the
E - 11
total cost of premises and equipment and the related
accumulated depreciation, year over year, is the result of
the retirement of fully depreciated assets.
WesBanco has operating leases for certain land, office
locations and equipment. Leases that expire are generally
renewed or replaced by other leases. Rental expense
pertaining to these leases was $0.9 million, $0.4 million
and $0.3 million, for the years ended December 31, 2002,
2001, and 2000, respectively.
Future lease payments under operating leases at December 31, 2002
are as follows: (in thousands)
=================================================================
2003 $ 936
2004 835
2005 715
2006 486
2007 166
2008 and thereafter 90
-------
Total future minimum lease payments $ 3,228
=================================================================
Note 6: Goodwill and Other Intangible Assets
Upon the adoption of SFAS No. 142 on January 1, 2002,
WesBanco ceased amortizing its goodwill, which decreased
noninterest expense and increased net income in 2002 as
compared to 2001 and 2000. In 2002 WesBanco capitalized
$30.6 million in goodwill and $11.1 million in core deposit
intangibles in connection with the American acquisition.
These core deposit intangible assets will be amortized over
their estimated useful lives of 8 years.
The following table shows the pro forma effects of applying
SFAS No. 142 to the 2001 and 2000 periods.
For the years ended December 31,
(dollars in thousands, except per --------------------------------
share amounts) 2002 2001 2000
========================================================================
Goodwill:
Reported net income $34,826 $29,002 $26,924
Add back: Goodwill amortization --- 1,313 1,535
---------------------------
Adjusted net income $34,826 $30,315 $28,459
===========================
Earnings per share:
Reported net income $1.70 $1.60 $1.41
Add back: Goodwill amortization --- .07 .08
---------------------------
Adjusted net income $1.70 $1.67 $1.49
=======================================================================
Amortization expense on core deposit intangibles
totaled $1.8 million for the year ended December 31, 2002.
Amortization on finite-lived intangible assets is expected
to total $1.4 million, $1.3 million, $1.0 million, $0.9
million and $0.7 million in 2003, 2004, 2005, 2006, and
2007, respectively.
Note 7: Certificates of Deposit
Certificates of deposit in denominations of $100
thousand or more were $214.6 million and $161.6 million as
of December 31, 2002 and 2001, respectively. Related
interest expense was $7.4 million in 2002 and $7.5 million
in 2001.
At December 31, 2002, the scheduled maturities of total
certificates of deposit are as follows: (in thousands)
======================================================
2003 $ 529,848
2004 213,854
2005 92,446
2006 84,884
2007 31,722
2008 and thereafter 4,457
---------
Total $ 957,211
======================================================
Note 8: Federal Home Loan Bank Borrowings
WesBanco is a member of the Federal Home Loan Bank of
Pittsburgh (the "FHLB"). The FHLB borrowings are secured
by a blanket lien by the FHLB on certain residential
mortgage loans or securities with a market value at least
equal to the outstanding balances. The remaining maximum
borrowing capacity with the FHLB at December 31, 2002 was
approximately $589.4 million.
At December 31, 2002 and 2001 WesBanco had FHLB
borrowings of $343.3 million and $106.9 million, with a
weighted average cost of 4.2% and 5.1%, respectively.
E - 12
Note 8: Federal Home Loan Bank Borrowings (continued)
The following table summarizes the FHLB maturities at
December 31, 2002 based on contractual dates: (in thousands)
=============================================================
2003 $ 85,200
2004 44,900
2005 30,332
2006 10,013
2007 49,219
2008 and thereafter 123,660
---------
Total $ 343,324
=============================================================
Note 9: Other Borrowings
Other borrowings consist of federal funds purchased,
securities sold under agreements to repurchase, treasury
tax and loan notes, and a revolving line of credit. These
instruments represent short-term borrowings, generally
maturing within one year from the transaction date. In
2002, WesBanco entered into a revolving one year, variable
rate line of credit agreement with a commercial bank
permitting the parent company to borrow a maximum aggregate
amount of $20.0 million. Interest incurred on other
borrowings amounted to $2.9 million, $5.6 million and $7.2
million, for the years ended December 31, 2002, 2001, and
2000, respectively.
Other borrowed funds are summarized as follows:
December 31,
-------------------------------
(in thousands) 2002 2001 2000
=============================================================================
Federal funds purchased $ 19,000 $ 30,000 $ 15,000
Securities sold under agreement to repurchase 143,994 140,558 106,165
Treasury tax and loan notes and other 2,440 1,684 4,440
Revolving line of credit, parent company 10,200 --- ---
-------------------------------
Total $ 175,634 $ 172,242 $ 125,605
=============================================================================
Information concerning securities sold under agreements to
repurchase is summarized as follows:
For the years ended December 31,
---------------------------------
(dollars in thousands) 2002 2001 2000
==============================================================================
Outstanding balance at year end $143,994 $140,558 $106,165
Average balance during the year 143,305 138,728 112,071
Maximum month end balance during the year 156,592 162,926 129,195
Average interest rate at year end 1.81% 2.00% 5.79%
Average interest rate during the year 1.86 3.56 5.68
==============================================================================
Note 10: Company Obligated Mandatorily Redeemable Capital Securities
of Subsidiary Trust Holding Solely Debentures of the Corporation
On March 1, 2002, WesBanco assumed $12.65 million of
8.5% Company Obligated Manditorily Redeemable Capital
Securities of Subsidiary Trust ("Trust Preferred
Securities") in connection with the American acquisition.
In April 1998, American created a statutory business trust
under Delaware law for the purpose of issuing the Trust
Preferred Securities. The proceeds from the sale of the
Trust Preferred Securities, as well as proceeds from the
issuance of common securities to American, were utilized by
the trust to invest in $13.04 million of 8.5% Junior
Subordinated Debentures ("the Debentures") of American.
The Debentures represent the sole assets of the trust.
The Trust Preferred Securities, which have a stated
value and liquidation preference of $10 per share, are
registered on the NASDAQ Stock Market under the symbol
WSBCP (formerly AMBCP). Interest on the Trust Preferred
Securities is cumulative and payable quarterly in arrears.
WesBanco has the right to optionally redeem the Debentures
on or after April 30, 2003, at 100% of the stated
liquidation amount plus accrued and unpaid distributions,
if any, to the redemption date. Proceeds from any
redemption of the Debentures would cause a mandatory
redemption of the Trust Preferred Securities and the common
securities having an aggregate liquidation amount equal to
the principal amount of the Debentures redeemed. The
Debentures mature on April 1, 2028.
The Trust Preferred Securities are presented as a
separate category of long-term debt on the Consolidated
Balance Sheet. For regulatory purposes, the Trust
Preferred Securities are included in Tier I Capital in
accordance with regulatory reporting requirements.
The interest incurred on these Trust Preferred
Securities for the year ended December 31, 2002 amounted to
$0.9 million.
E - 13
Note 11: Employee Benefit Plans
Defined Benefit Pension Plans and Other Postretirement
Plans: At December 31, 2002, substantially all employees
were participants in the WesBanco Defined Benefit Pension
Plan ("The Plan"). The Plan covers those employees who
satisfy minimum age and length of service requirements.
Benefits of the Plan are generally based on years of
service and the employee's compensation during the last
five years of employment. The Plan's funding policy has
been to contribute annually the maximum amount that can be
deducted for federal income tax purposes. Contributions
are intended to provide not only for benefits attributed to
historical years of service, but also for benefits expected
to be earned in the future.
Retirees and certain active employees are provided a
postretirement non-contributory health insurance and death
benefit plan. For reported years 2002 and 2001, the health
insurance benefit was $0.1 thousand per month and the death
benefit was $7.5 thousand.
Net periodic pension cost for the Plan includes the following components:
For the years ended December 31,
--------------------------------
(in thousands) 2002 2001 2000
=============================================================================
Service cost - benefits earned during year $ 1,243 $ 1,214 $ 1,064
Interest cost on projected benefit obligation 2,193 2,121 1,956
Expected return on plan assets (2,800) (3,204) (2,986)
Net amortization and recognized loss (45) (559) (638)
---------------------------
Net periodic pension cost (earnings) $ 591 $ (428) $ (604)
=============================================================================
The following tables summarize the activity in the projected benefit
obligation and Plan assets:
For the years ended
December 31,
-------------------
(in thousands) 2002 2001
=============================================================================
Projected benefit obligation, at beginning of year $30,323 $26,877
Service cost 1,243 1,214
Interest cost 2,193 2,121
Benefits paid (1,689) (1,505)
Change in interest rate assumptions --- 227
Actuarial loss 2,818 1,389
------------------
Projected benefit obligation, at end of year $34,888 $30,323
=============================================================================
For the years ended
December 31,
-------------------
(in thousands) 2002 2001
=============================================================================
Fair value of plan assets, at beginning of year $32,618 $37,199
Actual return on assets (3,674) (3,076)
Contributions 1,271 ---
Benefits paid (1,689) (1,505)
------------------
Fair value of plan assets, at end of year $28,526 $32,618
=============================================================================
Plan assets consist of debt and equity securities which include U.S. Agency
and Treasury issues, corporate bonds and notes, listed common stocks
including shares of WesBanco common stock (comprising less than 10% of Plan
assets) and short-term cash equivalent instruments.
The following table sets forth the Plan's funded status and
the asset reflected in the Consolidated Balance Sheet:
For the years ended
December 31,
-------------------
(in thousands) 2002 2001
=============================================================================
Plan assets in excess (less than) projected
benefit obligation $ (6,362) $ 2,295
Unrecognized prior service cost (1,091) (1,238)
Unrecognized net loss 11,065 1,875
-------------------
Prepaid pension cost $ 3,612 $ 2,932
=============================================================================
E - 14
Note 11: Employee Benefit Plans (continued)
The following table shows the amounts recognized in the
Consolidated Financial Statements:
For the years ended
December 31,
-------------------
(in thousands) 2002 2001
=============================================================================
Prepaid pension cost $ 3,612 $ 2,932
Additional minimum liability (4,925) ---
Accumulated other comprehensive income 4,925 ---
-------------------
Net amount recognized on balance sheet $ 3,612 $ 2,932
=============================================================================
Actuarial assumptions used in the determination of the
projected benefit obligation in the Plan are as follows:
For the years ended December 31,
--------------------------------
2002 2001 2000
==============================================================================
Weighted average discount rates 6.75% 7.50% 7.90%
Rates of increase in compensation levels 3.75 4.00 4.50
Weighted average expected long-term return on assets 8.50 8.75 8.75
==============================================================================
On March 1, 2002, WesBanco became the plan
administrator of the American non-contributory Defined
Benefit Pension Plan. Prior to the acquisition, American
had frozen all benefit accruals in its pension plan and
fully vested all participants in the benefits accrued to
them. As of December 31, 2002, the American plan had a
projected benefit obligation of $0.9 million, which was
equal to the fair value of the plan assets, and a prepaid
pension cost of $0.3 million recognized on the balance
sheet. Post-merger activity in the American plan for 2002
included net periodic pension costs of $44 thousand and
plan contributions of $34 thousand. WesBanco has no plans
to merge the American pension plan with any of the WesBanco
employee benefit plans.
KSOP (Employee Stock Ownership and 401(k) Plan):
Substantially all employees are included in the WesBanco
KSOP Plan. The KSOP plan consists of a non-contributory
employee stock ownership (ESOP) and a 401(k) Plan. The
401(k) provisions require WesBanco to make matching
contributions based upon an employee's contribution,
subject to regulatory limitations. For 2002, WesBanco
matched 50% of the first 2% of an employee's contribution
and 25% of the next 2%.
As of December 31, 2002, the Plan held 641,983 shares
of WesBanco stock, of which 560,532 shares were allocated
to specific employee accounts, and 81,451 shares were
unallocated. Dividends earned on unallocated shares are
used to pay interest on the ESOP loan. Dividends on
allocated shares are distributed to employee accounts.
During 2000, WesBanco's ESOP renewed a revolving line
of credit with an affiliated lender. Conditions in the
loan agreement provide for a revolving line of credit in
the aggregate amount of $2.0 million to facilitate
purchases of WesBanco common stock in the open market. The
loan bears interest at a rate equal to the lender's base
rate and requires annual repayments of principal equal to
20% of the balance at January 1 of each year. The loan has
a final maturity date of 5 years from date of inception.
The revolving line of credit had an outstanding balance of
$1.0 million, $1.6 million and $0 at December 31, 2002,
2001 and 2000, respectively.
Total contributions to the KSOP for the three years
ended December 31, 2002, 2001 and 2000 were $0.9 million,
$1.0 million and $1.1 million, respectively.
American maintained a profit sharing 401(k) savings
plan. On March 1, 2002 the American profit sharing 401(k)
savings plan was closed to new contributions and
participants and all eligible American participants were
automatically enrolled in the WesBanco 401(k) plan. As of
January 1, 2003, this plan was merged into the WesBanco,
Inc. 401(k) plan.
Key Executive Incentive Bonus & Stock Option Plan: The Key
Executive Incentive Bonus & Option Plan, which commenced in
1998, is a non-qualified plan that includes three
components, an Annual Bonus, a Long-Term Incentive Bonus
and a Stock Option component. The three components allow
for payments of cash, or a mixture of cash and stock, or
granting of stock options, depending upon the component of
the plan in which the award is earned through the
attainment of certain performance goals. Performance goals
are established by WesBanco's Board of Directors.
Compensation expense incurred in 2002, 2001 and 2000
for the Annual Bonus component of the plan was $0.5
million, $0.5 million and $0.4 million, respectively.
During 2002, 2001,and 2000 awards in the amounts of $50
thousand, $43 thousand and $0, respectively, for the Long-
Term Bonus component were made to specific employees.
The Stock Option component provides for granting of
stock options to eligible employees. During 2002 the Board
of Directors provided for the issuance of 206,000 shares of
common stock for this component of the Plan at an option
price of $23.96. These options vest over a three-year
period and have no performance provisions. During 2001 and
2000, 159,924 and 28,000 shares, respectively, were granted
at an average option price of $20.88 and $22.00 per share,
respectively.
WesBanco accounts for stock options in accordance with
APB Opinion No. 25 "Accounting for Stock Issued to
Employees". Under APB No. 25, the 2002 and 2001 stock options
were granted at prices equal to fair market value at the
E - 15
date of the grants, and accordingly, no compensation
expense was recognized. All granted options become
immediately vested in the event of a change in control of
WesBanco.
The following table shows the shares activity in the Option Plan:
For the years ended December 31,
------------------------------------------------------------------------
Weighted Avg. Weighted Avg. Weighted Avg.
Exercise Price Exercise Price Exercise Price
2002 Per Share 2001 Per Share 2000 Per Share
================================================================================================================
Outstanding at beginning of the year 212,811 $22.03 52,887 $25.53 24,887 $29.50
Granted during the year 206,000 23.96 159,924 20.88 28,000 22.00
Exercised during the year --- --- --- --- --- ---
Forfeited during the year 1,392 20.74 --- --- --- ---
-------------------------------------------------------------------------
Outstanding at end of the year 417,419 $22.99 212,811 $22.03 52,887 $25.53
-------------------------------------------------------------------------
Exercisable at year end 226,778 $22.90 96,860 $23.31 34,218 $27.45
================================================================================================================
The following table shows the average remaining life of the
stock options at December 31, 2002:
Weighted Avg.
Average Remaining
Options Exercise Contractual
Years issued Outstanding Price Years
==========================================================================
1998 24,887 $29.50 3.50
2000 28,000 22.00 4.92
2001 158,532 20.88 7.85
2002 206,000 23.96 9.90
----------------------------------------
Total 417,419 8.40
=========================================================================
Note 12: Other Operating Expense
Other operating expense consists of the following:
For the years ended December 31,
--------------------------------
(in thousands) 2002 2001 2000
==============================================================================
Professional fees $ 4,139 $ 3,883 $ 3,568
Marketing 1,924 1,933 2,339
General administrative 1,128 945 1,035
Supplies 2,075 1,790 2,106
Postage 2,351 2,002 1,758
Telecommunication 2,322 1,767 2,229
Miscellaneous taxes 3,642 3,405 3,170
Goodwill amortization --- 1,313 1,535
Core deposit intangible amortization 1,810 --- ---
Other 3,652 3,869 3,151
---------------------------------
Total $ 23,043 $ 20,907 $ 20,891
==============================================================================
Note 13: Income Taxes
Reconciliation from the federal statutory income tax rate
to the effective tax rate is as follows:
For the years ended December 31,
-------------------------------
2002 2001 2000
=============================================================================
Federal statutory tax rate 35.0% 35.0% 35.0%
Tax-exempt interest income from securities of
states and political subdivisions - net (11.9) (8.9) (7.9)
State income taxes 2.5 3.4 3.8
Other - net (2.2) 0.3 0.4
----------------------------
Effective tax rate 23.4% 29.8% 31.3%
=============================================================================
E - 16
Note 13: Income Taxes (continued)
The provision for income taxes applicable to income before
taxes consists of the following:
For the years ended December 31,
--------------------------------
(in thousands) 2002 2001 2000
==============================================================================
Current:
Federal $ 8,425 $ 10,356 $ 9,936
State 1,804 2,158 2,406
Deferred:
Federal 441 (201) 16
State (50) (31) (87)
--------------------------------
Total $ 10,620 $ 12,282 $ 12,271
==============================================================================
The following income tax amounts were recorded in shareholders'
equity as an element of other comprehensive income:
For the years ended December 31,
-------------------------------
(in thousands) 2002 2001 2000
=============================================================================
Securities and derivative transactions $ 2,054 $ 2,577 $ 4,630
Minimum pension liability (1,970) --- ---
---------------------------
Total $ 84 $ 2,577 $ 4,630
=============================================================================
Deferred tax assets and deferred tax liabilities consist of the following:
December 31,
--------------------------
(in thousands) 2002 2001 2000
=============================================================================
Deferred tax assets:
Allowance for loan losses $ 9,569 $ 8,029 $ 7,538
Compensation and benefits 2,369 418 487
Net operating loss carryforward --- 338 410
Deferred loan fees and costs 510 --- ---
Purchase accounting adjustments 1,790 --- ---
Tax effect of fair value adjustments on
securities available for sale --- --- 214
Other 37 --- 10
-------------------------
Gross deferred tax assets 14,275 8,785 8,659
-------------------------
Deferred tax liabilities:
Tax effect of fair value adjustments on
securities available for sale and derivatives (4,134) (2,363) ---
Depreciation (988) (1,366) (1,288)
Purchase accounting adjustments --- (431) (452)
Accretion on securities (939) (401) (344)
Deferred loan fees and costs --- (24) (138)
Other --- (108) ---
-------------------------
Gross deferred tax liabilities (6,061) (4,693) (2,222)
-------------------------
Net deferred tax assets $ 8,214 $ 4,092 $ 6,437
=============================================================================
WesBanco determined that it was not required to
establish a valuation allowance for deferred tax assets
since management believes that the deferred tax assets are
likely to be realized through a carryback to taxable income
in prior years, future reversals of existing taxable
temporary differences and, to a lesser extent, future
taxable income.
Note 14: Disclosures About Fair Value of Financial Instruments
Fair value estimates of financial instruments are
based on the present value of expected future cash flows,
quoted market prices of similar financial instruments, if
available, and other valuation techniques. These
valuations are significantly affected by discount rates,
cash flow assumptions, and risk assumptions used.
Therefore, fair value estimates may not be substantiated by
comparison to independent markets and are not intended to
reflect the proceeds that may be realizable in an immediate
settlement of the instruments.
The aggregate fair value of amounts presented does not
represent the underlying value of WesBanco. Management does
not have the intention to dispose of a significant portion
of its financial instruments and, therefore, the unrealized
gains or losses should not be interpreted as a forecast of
future earnings and cash flows.
E - 17
The following table represents the estimates of fair value
of financial instruments:
December 31,
-----------------------------------------------
2002 2001
--------------------- ----------------------
Carrying Fair Carrying Fair
(in thousands) Amount Value Amount Value
=================================================================================
Financial assets:
Cash and short-term investments $ 81,085 $ 81,085 $ 82,275 $ 82,275
Securities held to maturity 499,161 514,735 240,953 242,558
Securities available for sale 694,735 694,735 517,517 517,517
Net loans (including loans
held for sale) 1,795,805 1,825,435 1,518,909 1,537,068
Financial liabilities:
Deposits 2,399,956 2,411,652 1,913,458 1,928,572
Federal Home Loan Bank borrowing 343,324 357,876 106,889 109,631
Other borrowings 175,634 175,783 172,242 172,326
Company obligated mandatory
redeemable capital securities
of subsidiary trust 12,650 12,713 --- ---
Derivatives:
Interest rate swaps (5,835) (5,835) (2,122) (2,122)
=================================================================================
The following methods and assumptions are used to estimate
the fair value of like kinds of financial instruments:
Cash and short-term investments: The carrying amount for cash and short-term
investments is a reasonable estimate of fair value. Short-term investments
consist of federal funds sold.
Securities: Fair values for securities are based on quoted
market prices, if available. If market prices are not
available, then quoted market prices of similar instruments
are used.
Net loans: Fair values for loans with interest rates that
fluctuate as current rates change are generally valued at
carrying amounts. The fair values for residential mortgage
loans are based on quoted market prices of securitized
financial instruments, adjusted for remaining maturity and
differences in loan characteristics. Fair values of
commercial real estate, construction and personal loans are
based on a discounted value of the estimated future cash
flows expected to be received. The current interest rates
applied in the discounted cash flow method reflect rates
used to price new loans of similar type, adjusted for
relative risk and remaining maturity. For non-accrual
loans, fair value is estimated by discounting expected
future principal cash flows only.
Loans held for sale: The carrying amount for loans held for
sale is a reasonable estimate of fair value.
Deposits: The carrying amount is considered a reasonable
estimate of fair value for demand, savings and other
variable rate deposit accounts. The fair value of fixed
maturity certificates of deposit is estimated by a
discounted cash flow method using the rates currently
offered for deposits of similar remaining maturities.
Other borrowings: For federal funds purchased and
repurchase agreements, which represent short-term
borrowings, the carrying amount is a reasonable
approximation of fair value. For longer term Federal Home
Loan Bank advances, fair value is based on rates currently
available to WesBanco for borrowings with similar terms and
remaining maturities.
Derivatives: Fair values for interest rate swaps are
estimated by obtaining quotes from brokers. The fair value
adjustments, recorded in the other liabilities section of
the Consolidated Balance Sheet, represent the amount
WesBanco would receive or pay to terminate the agreement
considering current interest rates.
Off-balance sheet financial instruments: Off-balance sheet
financial instruments consist of commitments to extend
credit and letters of credit. Fair values for commitments
to extend credit are estimated using the fees currently
charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the
present credit standing of the counterparties. The
estimated fair value of the commitments to extend credit
and letters of credit are immaterial and therefore not
presented in the above table.
E - 18
Note 15: Comprehensive Income
The components of comprehensive income are as follows:
For the years ended December 31,
-------------------------------
(in thousands) 2002 2001 2000
=============================================================================
Net income $ 34,826 $ 29,002 $ 26,924
Other comprehensive income - net of tax:
Net fair value adjustment on securities
available for sale 6,469 5,584 7,091
Net securities gains reclassified
into earnings (582) (770) ---
Cumulative effect of accounting change
for derivative financial instruments --- 558 ---
Net fair value adjustment on derivatives (2,051) (1,301) ---
Net derivative gains reclassified
into earnings (136) (146) ---
Minimum pension liability (2,955) --- ---
------------------------------
Other comprehensive income 745 3,925 7,091
------------------------------
Comprehensive income $ 35,571 $ 32,927 $ 34,015
=============================================================================
Note 16: Commitments and Contingent Liabilities
Commitments: In the normal course of business, WesBanco
offers off-balance sheet credit arrangements to enable its
customers to meet their financing objectives. Those
instruments involve, to varying degrees, elements of credit
and interest rate risk in excess of the amount recognized
in the financial statements. WesBanco has various
commitments outstanding to extend credit approximating
$262.0 million and $251.4 million and standby letters of
credit of $29.1 million and $18.3 million as of December
31, 2002 and 2001, respectively.
WesBanco's exposure to credit losses in the event of
non-performance by the other parties to the financial
instruments for commitments to extend credit and standby
letters of credit is limited to the contractual amount of
those instruments. WesBanco uses the same credit policies
in making commitments and conditional obligations as for
all other lending.
Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements.
Expected losses on such commitments are recorded in other
liabilities.
Letters of credit are conditional commitments issued
by banks to guarantee the performance of a customer to a
third party. Those guarantees are primarily issued to
support public and private borrowing arrangements,
including normal business activities, bond financing and
similar transactions.
Contingent Liabilities: WesBanco and its affiliates are
parties to various legal and administrative proceedings and
claims. While any litigation contains an element of
uncertainty, management believes that the outcome of such
proceedings or claims pending or known to be threatened
will not have a material adverse effect on WesBanco's
consolidated financial position.
Note 17: Derivatives
WesBanco may enter into interest rate swap agreements
to manage its own risks arising from movement in interest
rates. During 2001, WesBanco had entered into interest rate
swap agreements that effectively converted $125.0 million
of its prime based money market deposit accounts to a
fixed-rate basis for an average term of 5.24 years, thus
reducing the impact of rising interest rates on future
interest expense. At December 31, 2002 and December 31,
2001, the notional amount of the swap agreements was $110.5
million and $122.2 million, respectively, with WesBanco
receiving a weighted average variable rate of 2.16% and
2.42%, and paying a weighted average fixed rate of 4.37%.
At December 31, 2002 net fair value adjustments on
interest rate swap agreements reflected unrealized pretax
net losses of $5.8 million. Fair value adjustments
represent temporary fluctuations resulting from changes in
market rates in relation to the average fixed pay rate and
projected variable receive rate over the remaining term of
the derivative. If derivatives are held to their
respective dates, no fair value gain or loss is realized.
During 2000, all then outstanding interest rate swap
agreements were terminated, generating a deferred gain of
$1.0 million, which was reported as a component of other
comprehensive income. The deferred gain is being amortized,
using the interest method, over the remainder of the
original term of the terminated swap agreements ending in
September of 2006. WesBanco amortized $0.2 million and $0.2
million of interest rate swap gains during 2002 and 2001,
respectively. WesBanco will realize $0.2 million of
interest rate swap gains during 2003.
E - 19
The following table summarizes the 2002 changes in the accumulated other
comprehensive income resulting from derivatives:
(in thousands)
=============================================================================
Balance at December 31, 2001 $ (889)
Net deferred gains on derivatives reclassified into earnings (136)
Net interest expense on the effective portion of
derivatives reclassified into earnings 1,419
Net change in fair value on the effective portion of
derivatives not reclassified into earnings (3,470)
---------
Balance at December 31, 2002 $ (3,076)
=============================================================================
Note 18: Transactions With Related Parties
Certain directors and officers (including their
affiliates, families and entities in which they are
principal owners) of WesBanco and its subsidiaries are
customers of those subsidiaries and have had, and are
expected to have, transactions with the subsidiaries in the
ordinary course of business. In addition, certain
directors are also directors or officers of corporations,
which are customers of the bank and have had, and are
expected to have, transactions with the bank in the
ordinary course of business. In the opinion of management,
such transactions are consistent with prudent banking
practices and are within applicable banking regulations.
Indebtedness of related parties aggregated approximately
$52.7 million, $62.3 million and $48.2 million as of
December 31, 2002, 2001, and 2000, respectively. During
2002, $163.7 million in related party loans were funded and
$173.3 million were repaid.
Note 19: Regulatory Matters
WesBanco (Parent Company) is a legal entity separate
and distinct from its subsidiaries. There are various legal
limitations on the extent to which WesBanco's banking
subsidiary may extend credit, pay dividends or otherwise
supply funds to WesBanco. Certain restrictions under
Federal and State law exist regarding the ability of a bank
subsidiary to pay dividends to WesBanco. Approval is
required if total dividends declared by a bank subsidiary,
in any calendar year, exceeds net profits for that year
combined with its retained net profits for the preceding
two years. In determining to what extent to pay dividends,
a bank subsidiary must also consider the effect of dividend
payments on applicable risk-based capital and
leverage ratio requirements. During the first quarter of
2002 and 2001, Federal and State regulatory agencies
granted approval to declare special dividends to WesBanco
for the purpose of funding share repurchase plans. As of
December 31, 2002 and 2001, WesBanco's banking subsidiary,
could not have declared any dividends to be paid to
WesBanco without prior approval from regulatory agencies.
Federal Reserve regulations require depository
institutions to maintain cash reserves with the Federal
Reserve Bank. The average amounts of required reserve
balances were approximately $25.5 million and $29.0 million
during 2002 and 2001, respectively.
WesBanco is subject to various regulatory capital
requirements (risk-based capital ratios) administered by
Federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if
undertaken, could have a material effect on WesBanco's
financial results.
All banks are required to have core capital (Tier 1)
of at least 4% of risk-weighted assets, total capital of at
least 8% of risk-weighted assets, and a minimum Tier 1
leverage ratio of 3% of adjusted quarterly average assets.
Tier 1 capital consists principally of shareholders'
equity, excluding unrealized gains and losses on securities
available for sale and derivatives, less goodwill and
certain other intangibles. Total capital consists of Tier 1
capital plus the allowance for loan losses subject to
limitation. The regulations also define well-capitalized
levels of Tier 1, total capital, and Tier 1 leverage as 6%,
10%, and 5%, respectively. WesBanco and its banking
subsidiary were categorized as well-capitalized under the
Federal Deposit Insurance Corporation Improvement Act at
December 31, 2002 and 2001. There are no conditions or
events since December 31, 2002 that management believes
have changed WesBanco's well-capitalized category.
The following table summarizes risk-based capital amounts
and ratios for WesBanco and its bank subsidiary:
December 31,
-----------------------------------
2002 2001
---------------- ---------------
(dollars in thousands) Amount Ratio Amount Ratio
=============================================================================
WesBanco, Inc.
Tier 1 Leverage $274,660 8.53% $235,726 9.62%
Tier 1 Capital to Risk-Weighted Assets 274,660 12.95 235,726 14.09
Total Capital to Risk-Weighted Assets 299,740 14.13 256,512 15.34
----------------------------------
WesBanco Bank, Inc.
Tier 1 Leverage $274,864 8.56% $226,059 9.28%
Tier 1 Capital to Risk-Weighted Assets 274,864 13.01 226,059 13.57
Total Capital to Risk-Weighted Assets 299,936 14.20 246,826 14.81
=============================================================================
E - 20
Note 20: Condensed Parent Company Financial Statements
Presented below are the condensed Balance Sheet, Statement
of Income and Statement of Cash Flows for the Parent Company:
Balance Sheet December 31,
---------------------
(in thousands) 2002 2001
=============================================================================
Assets
Cash and short-term investments $ 5,617 $ 5,746
Investment in subsidiaries:
Banking 337,514 248,746
Nonbank 6,075 6,491
Securities available for sale carried at fair value 12,366 14,974
Other assets 1,298 483
--------------------
Total Assets $ 362,870 $ 276,440
====================
Liabilities
Borrowings $ 18,728 $ 13,272
Company obligated mandatorily redeemable capital
securities of subsidiary trust holding solely
debentures of the Corporation 12,650 ---
Dividends payable and other liabilities 6,321 4,967
--------------------
Total Liabilities 37,699 18,239
Shareholders' Equity 325,171 258,201
--------------------
Total Liabilities and Shareholders' Equity $ 362,870 $ 276,440
=============================================================================
Statement of Income For the years ended December 31,
--------------------------------
(in thousands) 2002 2001 2000
==============================================================================
Dividends from subsidiaries:
Banking $30,000 $33,000 $30,000
Nonbank 650 550 ---
Income from securities 508 735 838
Other income 101 109 225
---------------------------
Total income 31,259 34,394 31,063
Total expense 3,236 1,981 1,781
---------------------------
Income before income tax benefit and undistributed
net income (excess dividends) of subsidiaries 28,023 32,413 29,282
Income tax benefit (1,190) (631) (476)
---------------------------
Income before undistributed net income
of subsidiaries 29,213 33,044 29,758
Undistributed net income (excess dividends)
of subsidiaries 5,613 (4,042) (2,834)
---------------------------
Net Income $34,826 $29,002 $26,924
=============================================================================
Statement of Cash Flows For the years ended December 31,
-------------------------------
(in thousands) 2002 2001 2000
=============================================================================
Cash flows from operating activities:
Net income $34,826 $29,002 $26,924
Excess dividends (undistributed net income)
of subsidiaries (5,613) 4,042 2,834
(Increase) decrease in other assets (100) 37 2,547
Other - net 872 (1,667) 148
---------------------------
Net cash provided by operating activities 29,985 31,414 32,453
---------------------------
Cash flows from investing activities:
Securities available for sale:
Proceeds from sales 194 405 4,252
Proceeds from maturities and calls 3,345 265 1,285
Payments for purchases (500) (963) (977)
Additional capitalization of subsidiaries (400) (75) (650)
---------------------------
Net cash provided by (used in)
investing activities 2,639 (368) 3,910
---------------------------
Cash flows from financing activities:
Borrowings (payments) on ESOP debt - net (543) 1,572 (350)
Increase in borrowings 6,000 200 9,500
Purchases of treasury stock - net (19,957) (14,975) (28,367)
Dividends paid (18,890) (16,737) (17,167)
Other 637 --- ---
---------------------------
Net cash used by financing activities (32,753) (29,940) (36,384)
---------------------------
Net increase (decrease) in cash and
cash equivalents (129) 1,106 (21)
Cash and short-term investments at
beginning of year 5,746 4,640 4,661
---------------------------
Cash and short-term investments at end of year $ 5,617 $ 5,746 $ 4,640
=============================================================================
E - 21
Note 21: Business Segments
WesBanco operates two reportable segments: community
banking and trust and investment services. WesBanco's
community banking segment offers services traditionally
offered by full-service commercial banks, including
commercial and individual demand and time deposit accounts
and commercial, mortgage and individual installment loans.
The trust and investment services segment offers trust
services as well as various alternative investment products
including mutual funds and annuities. The market values of
assets under management of the trust and investment
services segment were $2.3 billion, $2.8 billion and $3.1
billion, at December 31, 2002, 2001 and 2000, respectively.
These assets are held by WesBanco's affiliate, WesBanco
Bank, Inc. in fiduciary or agency capacities for their
customers and therefore are not included as assets on
WesBanco's Consolidated Balance Sheet.
Presented below are the condensed Statements of Income for
WesBanco's business segments:
Trust and
Community Investment
(in thousands) Banking Services Consolidated
==============================================================================
For the year ended December 31, 2002
Interest income $176,155 --- $176,155
Interest expense 72,555 --- 72,555
--------------------------------
Net interest income 103,600 --- 103,600
Provision for loan losses 9,359 --- 9,359
--------------------------------
Net interest income after provision
for loan losses 94,241 --- 94,241
Non-interest income 16,326 $11,526 27,852
Non-interest expense 69,781 6,866 76,647
--------------------------------
Income before income taxes 40,786 4,660 45,446
Provision for income taxes 8,756 1,864 10,620
--------------------------------
Net Income $ 32,030 $ 2,796 $ 34,826
=============================================================================
For the year ended December 31, 2001
Interest income $163,939 --- $163,939
Interest expense 76,354 --- 76,354
--------------------------------
Net interest income 87,585 --- 87,585
Provision for loan losses 5,995 --- 5,995
--------------------------------
Net interest income after provision
for loan losses 81,590 --- 81,590
Non-interest income 13,084 $ 11,504 24,588
Non-interest expense 58,042 6,852 64,894
--------------------------------
Income before income taxes 36,632 4,652 41,284
Provision for income taxes 10,421 1,861 12,282
Net Income $ 26,211 $ 2,791 $ 29,002
=============================================================================
For the year ended December 31, 2000
Interest income $163,079 --- $163,079
Interest expense 79,552 --- 79,552
--------------------------------
Net interest income 83,527 --- 83,527
Provision for loan losses 3,225 --- 3,225
--------------------------------
Net interest income after provision
for loan losses 80,302 --- 80,302
Non-interest income 11,150 $ 12,226 23,376
Non-interest expense 57,846 6,637 64,483
--------------------------------
Income before income taxes 33,606 5,589 39,195
Provision for income taxes 10,035 2,236 12,271
--------------------------------
Net Income $ 23,571 $ 3,353 $ 26,924
=============================================================================
E - 22
Management's Responsibility for Financial Statements
- ------------------------------------------------------------
The financial statements and the information
pertaining to those statements are the responsibility of
management. The financial statements have been prepared in
conformity with accounting principles generally accepted in
the United States, applied on a consistent basis.
The accounting systems of WesBanco and its
subsidiaries include internal controls and procedures which
provide reasonable assurance as to the reliability of the
financial records. Internal controls are generally
supported by written policies and procedures. WesBanco's
internal audit function performs audits of operations,
reviews procedures, monitors adherence to corporate
policies and submits written audit reports to the Audit
Committee. The Audit Committee of the Board of Directors is
composed of only independent directors. The Audit Committee
meets regularly with management, internal audit and
independent auditors to review accounting, auditing and
financial matters. The internal auditors, Federal and State
examiners, and Ernst & Young LLP have full access to the
Audit Committee to discuss any appropriate matters.
The financial statements have been audited by Ernst &
Young LLP, independent auditors. Their accompanying report
is based on an audit conducted in accordance with auditing
standards generally accepted in the United States.
/s/ Paul M. Limbert /s/ Robert H. Young
Paul M. Limbert Robert H. Young
President and Chief Executive Vice
Executive Officer President and Chief
Financial Officer
Report of Ernst & Young LLP, Independent Auditors
- --------------------------------------------------------------
Shareholders and Board of Directors
WesBanco, Inc.
We have audited the accompanying consolidated balance
sheets of WesBanco, Inc. and subsidiaries as of December
31, 2002 and 2001, and the related consolidated statements
of income, changes in shareholders' equity, and cash flows
for each of the three years in the period ended December
31, 2002. These financial statements are the responsibility
of WesBanco, Inc.'s management. Our responsibility is to
express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing
standards generally accepted in the United States. Those
standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles
used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to
above present fairly, in all material respects, the
consolidated financial position of WesBanco, Inc. and
subsidiaries at December 31, 2002 and 2001, and the
consolidated results of their operations and their cash
flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
January 24, 2003
Pittsburgh, Pennsylvania
E - 23
Condensed Quarterly Statement of Income
- ------------------------------------------------------------------------------
(in thousands, except per share amounts)
2002 Quarter ended
----------------------------------------------------------------
Annual
March 31 June 30 September 30 December 31 Total
========================================================================================================
Interest income $40,869 $45,566 $44,986 $44,734 $176,155
Interest expense 16,616 18,915 18,798 18,226 72,555
----------------------------------------------------------------
Net interest income 24,253 26,651 26,188 26,508 103,600
Provision for loan losses 2,239 1,760 2,757 2,603 9,359
----------------------------------------------------------------
Net interest income after provision
for loan losses 22,014 24,891 23,431 23,905 94,241
Non-interest income 7,104 6,657 6,641 7,450 27,852
Non-interest expense 17,780 19,884 19,330 19,653 76,647
----------------------------------------------------------------
Income before income taxes 11,338 11,664 10,742 11,702 45,446
Provision for income taxes 3,270 2,986 1,782 2,582 10,620
----------------------------------------------------------------
Net Income $ 8,068 $ 8,678 $ 8,960 $ 9,120 $ 34,826
================================================================
Earnings per share $0.42 $0.41 $0.43 $0.44 $1.70
========================================================================================================
2001 Quarter ended
----------------------------------------------------------------
Annual
March 31 June 30 September 30 December 31 Total
========================================================================================================
Interest income $40,905 $41,340 $41,563 $40,131 $163,939
Interest expense 19,969 19,642 19,519 17,224 76,354
----------------------------------------------------------------
Net interest income 20,936 21,698 22,044 22,907 87,585
Provision for loan losses 900 1,123 2,327 1,645 5,995
----------------------------------------------------------------
Net interest income after provision
for loan losses 20,036 20,575 19,717 21,262 81,590
Non-interest income 6,000 6,053 6,150 6,385 24,588
Non-interest expense 15,044 16,187 16,260 17,403 64,894
----------------------------------------------------------------
Income before income taxes 10,992 10,441 9,607 10,244 41,284
Provision for income taxes 3,587 3,141 2,601 2,953 12,282
----------------------------------------------------------------
Net Income $ 7,405 $ 7,300 $ 7,006 $ 7,291 $ 29,002
================================================================
Earnings per share $0.40 $0.40 $0.39 $0.41 $1.60
========================================================================================================
E - 24
Management's Discussion and Analysis of the Consolidated Financial Statements
- ------------------------------------------------------------------------------
Management's Discussion and Analysis represents an overview of the results
of operations and financial condition of WesBanco, Inc. This discussion and
analysis should be read in conjunction with the Consolidated Financial
Statements and Notes thereto.
Forward-Looking Statements
Forward-looking statements in this report relating to WesBanco's plans,
strategies, objectives, expectations, intentions and adequacy of resources,
are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Investors are cautioned that such
forward-looking statements, which are not historical fact, involve risks
and uncertainties. Such statements are subject to important factors that
could cause actual results to differ materially from those contemplated by
such statements, including without limitation, the effect of changing
regional and national economic conditions; changes in interest rates; credit
risks of commercial, real estate, and consumer loan customers and their
lending activities; actions of the Federal Reserve Board and Federal Deposit
Insurance Corporation, legislative and Federal and State regulatory actions
and reform, or other unanticipated external developments materially
impacting WesBanco's operational and financial performance. WesBanco
does not assume any duty to update forward-looking statements.
Application of Critical Accounting Policies & Estimates
WesBanco's consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United States and
follow general practices within the industries in which it operates.
Application of these principles requires management to make estimates,
assumptions and judgements that affect the amounts reported in the financial
statements and accompanying notes. These estimates, assumptions, and
judgements are based on information available as of the date of the
financial statements; accordingly, as this information changes, the
financial statements could reflect different estimates, assumptions,
and judgements. Certain policies inherently have a greater reliance
on the use of estimates, assumptions and judgements and as such have
a greater possibility of producing results that could be materially
different than originally reported. Estimates, assumptions, and judgements
are necessary when assets and liabilities are required to be recorded at
fair value, when a decline in the value of an asset not carried on the
financial statements at fair value warrants an impairment write-down or
valuation reserve to be established, or when an asset or liability needs
to be recorded contingent upon a future event. Carrying assets and
liabilities at fair value inherently results in more financial statement
volatility.
The most significant accounting policies followed by WesBanco are
included in Note 1 to the Consolidated Financial Statements. These policies,
along with other Notes to the Consolidated Financial Statements and in
this Management's Discussion and Analysis, provide information on how
significant assets and liabilities are valued in the financial statements
and how those values are determined. Based on the valuation techniques
used and the sensitivity of financial statement amounts to the methods,
assumptions, and estimates underlying those amounts, management has
identified the determination of the allowance for loan losses and goodwill
and other intangible assets to be the accounting estimates that require
the most subjective or complex judgements, and as such could be most
subject to revision as new information becomes available.
The allowance for loan losses represents management's estimate of
probable credit losses inherent in the loan portfolio. Determining the
amount of the allowance for loan losses is considered a critical
accounting estimate because it requires significant judgements and the
use of estimates related to the amount and timing of expected future cash
flows on impaired loans, estimated losses on pools of homogeneous loans
based on historical loss experience, consideration of current economic
trends and conditions, and other relevant factors, all of which may be
susceptible to significant change. See Note 1 of the Consolidated
Financial Statements along with the Loans and Credit Risk section
located in this Management's Discussion and Analysis for a description
of the methodology used to determine the allowance for loan losses and
a discussion of the factors affecting the amount of the allowance for
loan losses.
SFAS No. 142, "Accounting for Goodwill and Other Intangible Assets,"
establishes standards for the amortization of acquired intangible assets
and impairment assessment of goodwill. At December 31, 2002, WesBanco had
core deposit intangibles of $9.3 million subject to amortization and
goodwill of $49.5 million, which was not subject to periodic amortization.
Goodwill arising from business combinations represents the value
attributable to unidentifiable intangible elements in the business
acquired. WesBanco's goodwill relates to the value inherent in the banking
industry and that value is dependent upon WesBanco's ability to provide
quality, cost effective services in a competitive marketplace. As such,
goodwill value is supported ultimately by revenue that is driven by the
volume of business transacted. A decrease in earnings resulting
from a decline in customer base or the inability to deliver cost
effective services over sustained periods can lead to impairment of
goodwill that could adversely impact earnings in future periods.
SFAS No. 142 requires an annual evaluation of goodwill for impairment.
The fair value of WesBanco and the implied fair value of goodwill at the
respective reporting unit level are estimated using discounted cash flow
methodologies and industry comparable information. WesBanco has concluded
that the recorded value of goodwill was not impaired as a result of the
evaluation.
E - 25
Table 1. Five Year Selected Financial Summary
(dollars in thousands, except per share amounts)
December 31,
--------------------------------------------------------------------
2002 2001 2000 1999 1998
==================================================================================================================
Per share information:
Dividends $0.935 $ 0.92 $0.895 $ 0.88 $ 0.84
Book value at year end 15.89 14.46 13.92 13.63 14.35
Average common shares outstanding 20,459,122 18,123,851 19,092,927 20,229,524 20,867,193
Selected balance sheet information:
Total securities $1,193,896 $ 758,470 $ 546,389 $ 567,928 $ 680,550
Net loans 1,795,805 1,518,909 1,570,672 1,503,694 1,353,920
Total assets 3,297,231 2,474,454 2,310,137 2,269,726 2,242,712
Total deposits 2,399,956 1,913,458 1,870,361 1,814,001 1,787,642
Total shareholders' equity 325,171 258,201 258,506 269,664 296,483
Selected ratios:
Return on average assets 1.13% 1.21% 1.18% 1.23% 1.26%
Return on average equity 10.95 11.28 10.42 9.85 9.55
Dividend payout 55.00 57.50 63.47 64.23 61.76
Average equity to average assets 10.29 10.70 11.30 12.47 13.16
Trust assets, market value at year end $2,295,737 $2,808,862 $3,099,441 $3,087,610 $2,774,906
==================================================================================================================
For the years ended December 31,
--------------------------------------------------------------------
Summary statement of income: 2002 2001 2000 1999 1998
==================================================================================================================
Interest income $176,155 $163,939 $163,079 $155,861 $162,718
Interest expense 72,555 76,354 79,552 69,231 73,925
--------------------------------------------------------------------
Net interest income 103,600 87,585 83,527 86,630 88,793
Provision for loan losses 9,359 5,995 3,225 4,295 4,392
--------------------------------------------------------------------
Net interest income after provision
for loan losses 94,241 81,590 80,302 82,335 84,401
Non-interest income 27,852 24,588 23,376 24,581 25,715
Non-interest expense 76,647 64,894 64,483 67,813 68,308
--------------------------------------------------------------------
Income before income taxes 45,446 41,284 39,195 39,103 41,808
Provision for income taxes 10,620 12,282 12,271 11,465 13,495
--------------------------------------------------------------------
Net Income $ 34,826 $ 29,002 $ 26,924 $ 27,638 $ 28,313
--------------------------------------------------------------------
Earnings per share $1.70 $1.60 $1.41 $1.37 $1.36
==================================================================================================================
Earnings Summary
Earnings for 2002 were $34.8 million or $1.70 per
share compared to $29.0 million or $1.60 per share in 2001.
The results for 2002 reflect the acquisition of American
Bancorporation ("American") on March 1, 2002. Please see
Note 2 of the Consolidated Financial Statements for
additional information on the acquisition. WesBanco's 2002
financial performance was highlighted by growth in net
interest income, improved operating efficiencies and a
reduction in the effective tax rate. These positive factors
were partially offset by an increase in the provision for
loan losses.
Excluding the impact of certain adjusting items,
primarily merger-related expenses, net securities gains,
asset disposal losses, and goodwill amortization for 2001,
core earnings per share would have been $1.74 or $35.6
million for the year ended December 31, 2002, compared to
$1.64 or $29.7 million for the same period in 2001.
See Table 2 for a reconciliation of core earnings to
GAAP earnings.
Return on average assets was 1.13% and return on
average equity was 10.95% for the year ended December 31,
2002, compared to 1.21% and 11.28%, in 2001, respectively.
[GRAPH]
Core Earnings Per Share*
1998 $ 1.28
1999 $ 1.32
2000 $ 1.46
2001 $ 1.64
2002 $ 1.74
* Excludes amortization of goodwill, merger-related expenses,
net securities gains and net losses on sale of assets.
E - 26
Earnings Summary (continued)
Table 2. Reconciliation of Core Earnings To GAAP Earnings
For the years ended
December 31,
-----------------------
(dollars in thousands, except per share amounts) 2002 2001
=============================================================================
Net income $34,826 $29,002
Less: Net gains on securities and net
losses on sale of assets 863 726
Plus: Merger-related expenses 1,635 153
Amortization of goodwill - 1,313
-----------------------
Core earnings $35,598 $29,742
=======================
Net income per share $1.70 $1.60
Less: Net gains on securities and net
losses on sale of assets 0.04 0.04
Plus: Merger-related expenses 0.08 0.01
Amortization of goodwill - 0.07
-----------------------
Core earnings per share $1.74 $1.64
=============================================================================
Results Of Operations
Net Interest Income
Taxable equivalent net interest income, which is
WesBanco's largest revenue source, is the difference
between interest income on earning assets (loans,
securities and federal funds sold) and interest expense
paid on liabilities (deposits and borrowings) adjusted for
the stated tax rates. Taxable equivalent net interest
income is affected by the general level of interest rates,
changes in interest rates, and changes in the amount and
composition of interest earning assets and interest bearing
liabilities.
Taxable equivalent net interest income for 2002
increased $19.1 million or 20.5% in comparison to 2001. The
overall increase in net interest income was primarily
related to average earning assets, increasing $619.6
million or 27.7% and average interest bearing liabilities,
increasing $567.4 million or 29.9%. These average balance
sheet increases were primarily related to the acquisition
of American. Partially offsetting the increase in net
interest income due to balance sheet growth was a decline
in the taxable equivalent net interest margin to 3.93% in
2002 compared to 4.17% in 2001. As interest rates fell to
historic lows during 2002, factors contributing to the
decline in net interest margin included narrowing interest
rate spreads between loan and deposit products, increases
in loan refinancings, changes in the composition of earning
assets and shortening maturities in the securities
portfolio in anticipation of rising interest rates later in
2002. Table 4 presents the impact of these changes in
volume and rate on the components of tax equivalent net
interest income.
[GRAPH]
Net Interest Income*
in millions -------------------
1998 $ 93.96
1999 $ 92.11
2000 $ 88.40
2001 $ 93.15
2002 $112.20
* Taxable equivalent
Taxable equivalent interest income increased $15.3
million or 9.0% for 2002 compared to 2001. The increase in
taxable equivalent interest income was primarily due to an
increase in the volume of average earning assets which was
partially offset by decreases in yields. The taxable
equivalent yield on average earning assets decreased to
6.47% in 2002 from 7.58% in 2001. The decline in the
taxable equivalent yield was due to lower-margin acquired
net assets of American, an increase in securities with
lower yields, commercial loan and residential mortgage
refinancings at historically low interest rates, the
continued run off in higher-yielding but less profitable
indirect automobile lending, and reduced commercial loan
demand due to uncertain economic conditions in the business
sector.
Interest expense decreased $3.8 million or 5.0% from
2001. As shown in Table 3, the decrease in interest expense
resulted from a decline in the rate paid on average
interest bearing liabilities to 2.95% in 2002 from 4.03% in
2001, which was partially offset by a total volume increase
of 30.0% in 2002. The decrease in the rate paid on average
interest bearing liabilities was attributable to
significant interest rate reductions on interest bearing
deposits as well as lower rates on new FHLB borrowings and
other borrowings comprised mainly of repurchase agreements
and federal funds purchased. During 2002, customers shifted
out of savings accounts and long-term certificates of
deposit and invested in money market accounts. Average
other borrowings increased $181.3 million of which $150.0
million related to FHLB borrowings assumed in the American
acquisition.
[GRAPH]
Net Interest Margin %*
----------------------
1998 4.46%
1999 4.39%
2000 4.14%
2001 4.17%
2002 3.93%
* Taxable equivalent
E - 27
Table 3. Average Balance Sheet and Net Interest Analysis
For the years ended December 31,
--------------------------------------------------------------------------------------------------
2002 2001 2000
-------------------------------- -------------------------------- --------------------------------
Average Average Average Average Average Average
(dollars in thousands) Volume Interest Rate Volume Interest Rate Volume Interest Rate
=================================================================================================================================
Assets
Loans, net of unearned
income (1) $1,789,078 $124,912 6.98% $1,559,145 $126,230 8.10% $1,556,195 $128,591 8.26%
Securities: (2)
Taxable 703,308 34,670 4.93 425,006 25,692 6.05 374,302 24,297 6.49
Tax-exempt (3) 327,331 24,568 7.51 209,268 15,892 7.59 182,516 13,806 7.56
---------------------------------------------------------------------------------------------------
Total securities 1,030,639 59,238 5.75 634,274 41,584 6.56 556,818 38,103 6.84
Federal funds sold 35,683 604 1.69 42,421 1,687 3.98 18,703 1,217 6.51
---------------------------------------------------------------------------------------------------
Total earning assets (3) 2,855,400 $184,754 6.47% 2,235,840 $169,501 7.58% 2,131,716 $167,911 7.88%
---------------------------------------------------------------------------------------------------
Other assets 235,070 167,593 156,062
---------------------------------------------------------------------------------------------------
Total Assets $3,090,470 $2,403,433 $2,287,778
===================================================================================================
Liabilities and
Shareholders' Equity
Interest bearing
demand deposits $ 267,944 $ 1,685 0.63% $ 245,712 $ 3,920 1.60% $ 247,753 $ 5,026 2.03%
Money market 468,696 12,890 2.75 374,100 14,006 3.74 352,084 16,462 4.68
Savings deposits 352,333 3,852 1.09 252,606 4,671 1.85 265,723 5,264 1.98
Certificates of deposit 946,425 38,481 4.07 776,852 43,632 5.62 774,607 43,689 5.64
---------------------------------------------------------------------------------------------------
Total interest
bearing deposits 2,035,398 56,908 2.80 1,649,270 66,229 4.02 1,640,167 70,441 4.29
Other borrowings 416,085 14,730 3.54 245,390 10,125 4.13 155,149 9,111 5.87
Trust preferred securities 10,603 917 8.65
---------------------------------------------------------------------------------------------------
Total interest
bearing liabilities 2,462,086 $ 72,555 2.95% 1,894,660 $ 76,354 4.03% 1,795,316 $ 79,552 4.43%
---------------------------------------------------------------------------------------------------
Non-interest bearing
demand deposits 279,560 228,936 215,393
Other liabilities 30,762 22,759 18,645
Shareholders' Equity 318,062 257,078 258,424
---------------------------------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $3,090,470 $2,403,433 $2,287,778
===================================================================================================
Taxable equivalent net
interest margin (3) $112,199 3.93% $ 93,147 4.17% $ 88,359 4.14%
=================================================================================================================================
(1) Total loans are gross of allowance for loan losses, net of unearned
income, and include loans held for sale. Non-accrual loans were included
in the average volume for the entire period. Loan fees included in interest
on loans are not material.
(2) Average yields on securities available for sale have been calculated
based on amortized cost.
(3) Taxable equivalent basis is calculated on tax-exempt securities using a
tax rate of 35% for each year presented.
Table 4. Rate Volume Analysis of Changes in Interest Income and Interest
Expense (1)
2002 Compared to 2001 2001 Compared to 2000
--------------------------------- ------------------------------
Net Increase Net Increase
(in thousands) Volume Rate (Decrease) Volume Rate (Decrease)
=============================================================================================================
Increase (decrease) in interest income:
Loans, net of unearned income $17,291 $(18,609) $(1,318) $ 330 $(2,691) $(2,361)
Taxable securities 14,402 (5,424) 8,978 3,141 (1,746) 1,395
Tax-exempt securities(2) 8,864 (188) 8,676 2,031 55 2,086
Federal funds sold (235) (848) (1,083) 1,084 (614) 470
-------------------------------------------------------------------
Total interest income change 40,322 (25,069) 15,253 6,586 (4,996) 1,590
-------------------------------------------------------------------
Increase (decrease) in interest expense:
Interest bearing demand deposits 327 (2,562) (2,235) (41) (1,065) (1,106)
Money market 3,083 (4,199) (1,116) 980 (3,436) (2,456)
Savings deposits 1,909 (2,728) (819) (252) (341) (593)
Certificates of deposit 8,363 (13,514) (5,151) 126 (183) (57)
Other borrowings 6,490 (968) 5,522 4,257 (3,243) 1,014
-------------------------------------------------------------------
Total interest expense change 20,172 (23,971) (3,799) 5,070 (8,268) (3,198)
-------------------------------------------------------------------
Net interest income increase (decrease)(2) $20,150 $ (1,098) $19,052 $ 1,516 $ 3,272 $ 4,788
=============================================================================================================
(1) Changes to rate/volume are allocated to both rate and volume on a
proportionate dollar basis.
(2) Taxable equivalent basis is calculated on tax-exempt securities using a
tax rate of 35% for each year presented.
E - 28
Results of Operations (continued)
Provision For Loan Losses
The provision for loan losses in 2002 increased to
$9.4 million compared to $6.0 million in 2001. Net charge-
offs increased to $9.0 million compared to $5.2 million in
2001. As shown in Table 13, net charge-offs as a percentage
of average total loans increased to 0.50% in 2002 from
0.34% in 2001. The increase in the provision resulted from
increases in loan delinquencies, non-performing loans,
rising consumer loan losses and to a lesser extent from
growth in the loan portfolio associated with the American
acquisition. For additional information see the Allowance
for Loan Losses section of Loans and Credit Risk included
in this Management's Discussion and Analysis.
Non-Interest Income
Excluding net securities gains, 2002 non-interest
income increased $2.7 million or 11.5% from 2001. The
increase related primarily to growth in fee income earned
on deposit accounts acquired in the American transaction.
Trust fees remained consistent at $11.5 million for
the years ended December 31, 2002 and 2001 with managed
mutual fund asset fees and higher estate fees helping to
offset the impact of reduced market values. The market
value of trust assets at December 31, 2002 was $2.3
billion, a decrease of $513.1 million or 18.3% from
December 31, 2001, primarily related to reduced equity
market values.
[GRAPH]
Non-Interest Income* to
Average Assets
-----------------------
1998 0.87%
1999 0.92%
2000 0.99%
2001 0.97%
2002 0.86%
* Excludes net securities gains.
Deposit activity revenue increased approximately $1.6
million or 17.8% compared to 2001 due to increases in
income connected with customer deposit activities, debit
cards and automatic teller machines.
Other income increased by approximately $1.0 million
or 39.3% compared to 2001 as a result of an increase in the
net cash surrender value of bank owned life insurance and
benefits paid on these policies. Bank owned life insurance
increased from $10.5 million at December 31, 2001 to $62.9
million at December 31, 2002, with $11.7 million added
through the American acquisition. An additional investment
of $40.0 million was made during December 2002.
Net securities gains increased $0.6 million or 44.8%
in 2002 primarily from sales of U.S. Agency securities to
improve liquidity and reposition the securities portfolio
primarily after the acquisition of American. In 2002,
WesBanco recognized $0.9 million in other-than-temporary
impairment losses on investment securities.
Non-Interest Expense
Non-interest expenses, excluding amortization of
goodwill and merger-related expenses, increased $10.8
million or 17.0% from 2001. The increase was related
primarily to expansion of internal operations, personnel
and new banking offices acquired in the American
transaction. WesBanco's efficiency ratio improved to 53.44%
in 2002 from 54.25% in 2001.
Salaries and wages increased $3.4 million or 12.2% in
2002 primarily due to the additional employees acquired in
the American transaction as well as normal salary
increases. Employee benefit costs increased $2.0 million or
33.5% compared to 2001, primarily due to the increase in
employees. Full-time equivalent employees increased to
1,156 as of December 31, 2002 compared to 1,003 as of
December 31, 2001. In addition, pension and health care
costs were significant contributors to higher employee
benefit expense. Contributing to the rise in pension
expense during 2002 were reduced pension asset values and a
lower pension liability discount rate assumption. The
decline in pension asset values and discount rate resulted
in WesBanco recording a $3.0 million charge, net of tax, to
other comprehensive income. WesBanco anticipates a
significantly higher pension expense of approximately $1.8
million in 2003 as a result of these factors and a reduced
long-term rate of return assumption.
[GRAPH]
Non-Interest Expense* to
Average Assets
------------------------
1998 2.96%
1999 3.01%
2000 2.85%
2001 2.64%
2002 2.40%
* Excludes amortization of goodwill and
merger-related expenses.
In other non-interest expense categories, the increase
in net occupancy expense was principally due to the
integration of American's branch facilities. The increase
in equipment and other operating expense resulted from a
rise in technology-related expenses as WesBanco integrated
American's operations into its core banking and computer
network systems. Technology costs impacted a number of
expense categories including equipment maintenance
agreements, consulting services and data-line communication
charges.
During 2002, operating expenses were increased by core
deposit intangible amortization of $1.8 million associated
with the American acquisition. Additionally, WesBanco
ceased amortization of goodwill in accordance with the
adoption of SFAS No. 142, "Goodwill and Other Intangible
Assets" on January 1, 2002. Prior to adoption of the new
standard, annual
E - 29
goodwill amortization approximated $1.3 million. See
Notes 1, 2 and 6 of the Consolidated Financial Statements
for more information on the accounting for goodwill and
core deposit intangibles.
Merger-related expenses increased $2.3 million
compared to 2001 due to severance payments, data systems
conversion costs, and other merger-related expenses
associated primarily with the American acquisition.
Income Taxes
Although WesBanco's pretax income increased $4.2
million to $45.4 million in 2002 from $41.3 million in
2001, the provision for income taxes decreased by 13.5% to
$10.6 million in 2002. This decline in the provision was
caused by an increase in state and municipal tax exempt
income primarily due to a $118.1 million increase in
average tax exempt investment securities, the majority of
which was acquired in the American acquisition, as well as
additional purchases throughout the year. The effective tax
rate was further reduced by certain prior years' favorable
tax settlements. All of these factors lowered the effective
tax rate to 23% for 2002 from 30% for 2001. For 2003, it is
currently anticipated that the effective tax rate will
approximate 20%. The decrease in the estimated 2003
effective tax rate reflects an expected increase in state
and municipal tax exempt income and the purchase of
additional bank owned life insurance.
Federal income tax expense decreased $1.3 million to
$8.9 million in 2002 from $10.2 million in 2001. WesBanco's
West Virginia affiliates are subject to a state corporate
net income tax, which is based upon federal taxable income,
with certain modifications. The statutory West Virginia tax
rate was 9.0% for 2002 and 2001. West Virginia income tax,
included in the provision for income taxes, was $1.7
million for 2002 compared to $2.1 million for 2001. The
West Virginia provision was reduced by $0.4 million for
prior years' tax settlements resolved in 2002.
WesBanco's offices located in Ohio are subject to an
Ohio franchise tax, rather than a corporate income tax.
Ohio franchise taxes included in other operating expense
increased to $0.5 million in 2002 compared to $0.2 million
in 2001, primarily due to an increase in the Ohio assets
acquired from American.
Financial Condition
Securities
Securities, which represent a source of liquidity for
WesBanco, increased $435.4 million between December 31,
2001 and December 31, 2002, of which approximately $277.6
million of the increase was due to the American
acquisition. As shown in Table 5, available for sale
securities, at fair value, representing 58.2% of total
securities at December 31, 2002 increased $177.2 million or
34.2%. Held to maturity securities, representing the
remaining 41.8% of total securities increased $258.2
million or 107.2% during 2002. At December 31, 2002 the
average yield of the available for sale portfolio was 4.94%
with an average maturity of 2.2 years. For the same period,
the average yield of the held to maturity portfolio was
6.30% with an average maturity of 5.0 years.
[GRAPH]
(in millions Securities
----------------
1998 $ 681
1999 $ 568
2000 $ 546
2001 $ 758
2002 $ 1,194
During 2002, securities available for sale and held to
maturity increased as purchases of $673.8 million
significantly exceeded sales, maturities, paydowns and
calls of $526.6 million. These purchases placed an
increased amount of lower yielding securities on the
balance sheet, which decreased the yield on taxable
securities from 6.05% in 2001 to 4.93% in 2002 and
decreased, on a tax equivalent basis, the yield on tax
exempt securities from 7.59% in 2001 to 7.51% in 2002. The
decrease in the yield on investment securities in 2002 was
partially offset by the increased tax efficiency gained
through the $118.1 million increase in the volume of tax
exempt securities from 2001 to 2002.
Unrealized pre-tax gains/losses on available for sale
securities (fair value adjustments) was a $17.1 million
market gain as of December 31, 2002 compared to a $7.4
million market gain as of December 31, 2001. These fair
value adjustments represent temporary fluctuations
resulting from changes in market rates in relation to
average yields in the available for sale portfolio.
WesBanco can impact the magnitude of the fair value
adjustment by managing both the volume of securities
classified as available for sale and average maturities. If
securities are held to their respective maturity dates, no
fair value gain or loss is realized. During 2002 securities
with a total carrying value of $252.5 million either
matured or were called. In addition, $274.0 million of
available for sale securities were sold during 2002.
E - 30
Financial Condition (continued)
Table 5. Composition of Securities
December 31,
----------------------------------
(in thousands) 2002 2001 2000
=======================================================================================
Securities held to maturity (at amortized cost):
U.S. Treasury and Federal Agency securities $ 86,144 $ 1,001 $ 4,357
Obligations of states and political subdivisions (1) 382,752 221,866 173,771
Other securities 30,265 18,086 17,974
---------------------------------
Total securities held to maturity 499,161 240,953 196,102
---------------------------------
Securities available for sale (at fair value):
U.S. Treasury and Federal Agency securities 362,694 307,250 206,268
Obligations of states and political subdivisions (1) 8,152 12,076 12,907
Mortgage-backed and other securities (2) 323,889 198,191 131,112
---------------------------------
Total securities available for sale 694,735 517,517 350,287
---------------------------------
Total securities $1,193,896 $758,470 $546,389
=======================================================================================
(1) There are no individual securities included in obligations of states and
political subdivisions or other securities, which individually or in the
aggregate exceed ten percent of shareholders' equity.
(2) Other securities, classified as available for sale, include equity
interest in business corporations.
Table 6. Maturity Distribution and Yield Analysis of Securities
December 31, 2002
--------------------------------------------------------------------------------------------------
After One But After Five But
Within One Year Within Five Years Within Ten Years After Ten Years
---------------------- --------------------- -------------------- --------------------
(dollars in thousands) Amount Yield* Amount Yield* Amount Yield* Amount Yield*
===================================================================================================================================
Securities held to maturity:
U.S. Treasury and Federal
Agency securities $ 26,990 3.21% $ 59,154 3.23% - - - -
Obligations of states and
political subdivisions (1) 16,068 7.36 55,669 7.11 $136,812 6.86% $174,203 6.98%
Other securities (2) - - - - - - 30,265 3.25
--------------------------------------------------------------------------------------------------
Total held to maturity 43,058 4.76 114,823 5.11 136,812 6.86 204,468 6.43
--------------------------------------------------------------------------------------------------
Securities available for sale: (3)
U.S. Treasury and Federal
Agency securities 69,451 3.94 222,224 4.66 62,812 6.34 - -
Obligations of states and
political subdivisions (1) 3,192 6.17 3,771 6.55 498 9.10 490 10.12
Mortgage-backed and
other securities (4) 8,152 4.19 107,143 4.91 190,268 5.11 9,589 4.24
--------------------------------------------------------------------------------------------------
Total available for sale 80,795 4.05 333,138 4.76 253,578 5.42 10,079 4.52
--------------------------------------------------------------------------------------------------
Total securities $123,853 4.30% $447,961 4.85% $390,390 5.93% $214,547 6.34%
===================================================================================================================================
* Yields are calculated using a weighted average yield to maturity.
(1) Average yields on obligations of states and political subdivisions have
been calculated on a taxable equivalent basis.
(2) Other held to maturity securities include securities with no stated
maturity date.
(3) Average yields on securities available for sale have been calculated
based on amortized cost.
(4) Mortgage-backed securities, which have prepayment provisions, are
assigned to maturity categories based on estimated average lives.
Loans and Credit Risk
Loan Portfolio
The loan portfolio is WesBanco's single largest
balance sheet asset classification and the largest source
of interest income. WesBanco's loan portfolio consists of
five major categories of lending as set forth in Table 7.
Certain amounts have been reclassified from the manner in
which they were presented in previous years to enhance this
discussion and analysis.
The risk that borrowers will be unable or unwilling to
repay their obligations and default on loans is inherent in
all lending activities. In addition to this inherent risk,
economic conditions and other factors beyond WesBanco's
control can adversely impact credit risk. WesBanco's
primary goal in managing credit risk is to minimize the
impact of default by an individual borrower or group of
borrowers. Credit risk is managed both through the initial
underwriting process as well as through ongoing monitoring
and administration of the loan portfolio that varies by
category. WesBanco's credit policies establish standard
underwriting guidelines for each type of loan and require
an appropriate evaluation of the credit characteristics of
each borrower. This evaluation includes their repayment
capacity; the adequacy of collateral, if any, to secure
E - 31
the loan, including current market appraisals or other
valuations; and other factors unique to each loan that may
increase or mitigate its risk.
The downturn in the general economy that began late in
2000 extended through 2002 and has impacted WesBanco's loan
portfolio, both in terms of new lending activity and credit
quality. In addition to the general downturn, the Upper
Ohio Valley continues to be significantly impacted by the
difficulties facing the steel industry, which remains
threatened by foreign imports and other factors. Two of the
ten largest integrated steel companies in the United States
are headquartered in the Upper Ohio Valley. One of these
companies has been operating under Chapter 11 of the
Bankruptcy Act since November 2000. Both companies have
also significantly reduced their workforce. As of December
31, 2002, WesBanco had no material direct credit exposure
to steel companies. However, WesBanco extends credit to
consumers employed in the steel industry and to businesses
that provide products or services to the industry. In
addition, a number of other businesses not directly
associated with the steel industry could be adversely
impacted by a significant loss of employment. Approximately
45% of WesBanco's loan portfolio is comprised of borrowers
located in the Upper Ohio Valley. It is not possible to
accurately predict the impact that continued difficulties
in the steel industry may have on these customers and their
ability to repay their obligations.
[GRAPH]
(in millions) Total Loans
----------------
1998 $ 1,373
1999 $ 1,523
2000 $ 1,591
2001 $ 1,540
2002 $ 1,821
Table 7. Composition of Loans
December 31,
-------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
----------------- -------------- ----------------- ---------------- ----------------
% of % of % of % of % of
(dollars in thousands) Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
=====================================================================================================================
Loans:
Commercial $ 306,071 17% $ 271,269 18% $ 268,633 17% $ 276,383 18% $ 263,374 19%
Commercial real estate 504,902 28 342,337 22 315,933 20 268,808 18 240,992 18
Residential real estate 569,095 32 501,916 33 554,373 35 563,279 37 482,703 35
Home equity 117,964 6 98,400 6 86,427 5 64,277 4 48,350 3
Consumer 318,129 17 320,251 21 362,945 23 340,946 22 328,320 24
------------------------------------------------------------------------------------------
Total portfolio loans 1,816,161 100 1,534,173 100 1,588,311 100 1,513,693 99 1,363,739 99
Loans held for sale 4,724 --- 5,522 --- 2,391 --- 9,753 1 9,280 1
------------------------------------------------------------------------------------------
Total Loans $1,820,885 100% $1,539,695 100% $1,590,702 100% $1,523,446 100% $1,373,019 100%
====================================================================================================================
Loans are presented gross of allowance for loan losses and
net of unearned income on consumer loans.
Commercial and Commercial Real Estate: The commercial loan
category consists of loans to a wide variety of businesses
and includes revolving lines of credit to finance accounts
receivable, inventory and other working capital
requirements, and term loans to finance fixed assets other
than real estate, as well as loans guaranteed by the United
States Small Business Administration. Lines of credit are
generally renewable or may be cancelled by WesBanco
annually. Term loans secured by equipment and other types
of collateral have terms that are consistent with the
purpose of the loan and generally do not exceed ten years.
The commercial real estate category consists of loans
to finance properties that are used in the borrowers'
businesses and loans to finance investor-owned rental
properties. Commercial real estate loans generally have
repayment terms ranging from 10 to 25 years depending on
the type of property. Loans with amortization periods of
more than 20 years will generally also have a maturity of
10 years or less.
Commercial loans increased $34.8 million or 12.8%
between December 31, 2001 and December 31, 2002. This
increase is attributed primarily to approximately $35.0
million of commercial loans acquired from American, which
was offset by a modest decline in commercial lending over
the course of the year. Despite record low interest rates,
commercial loan growth was dampened by continued economic
weakness in WesBanco's primary market areas.
Commercial real estate loans increased $162.6 million
or 47.5% between December 31, 2001 and December 31, 2002.
This increase is attributed to approximately $140.0 million
of commercial real estate loans acquired from American and
$22.6 million of growth in commercial real estate lending.
Demand for commercial real estate was stronger in 2002 than
other types of commercial loans as investors looked to the
real estate market as a source of higher returns on
investment than were available in the equity and bond
markets. Record low interest rates also fueled a
significant amount of refinancings of commercial real
estate thereby lowering rates earned on this type of loan.
Included in commercial real estate loans are
commercial construction loans totaling $11.1 million at
December 31, 2002 and $3.9 million at December 31, 2001.
Construction loans are generally made only when WesBanco
also commits to the permanent financing of the commercial
project or residence, or has a takeout commitment from
another lender for the permanent loan. This increase in
construction loans is primarily attributed to WesBanco's
entry into the Columbus, Ohio market as a result of the
American acquisition.
E - 32
Financial Condition (continued)
Table 8. Maturity Distribution of Commercial and Commercial Real Estate Loans
December 31, 2002
-------------------------------------------------------
After One
In One Year through After
(in thousands) Year or Less Five Years Five Years Total
=============================================================================
Commercial $ 143,370 $ 72,028 $ 90,673 $ 306,071
Commercial real estate 49,507 82,507 372,888 504,902
------------------------------------------------------
Total $ 192,877 $ 154,535 $ 463,561 $ 810,973
======================================================
Fixed rates $ 26,574 $ 67,766 $ 63,184 $ 157,524
Variable rates 166,303 86,769 400,377 653,449
------------------------------------------------------
Total $ 192,877 $ 154,535 $ 463,561 $ 810,973
=============================================================================
Credit risk in the commercial and commercial real
estate categories is mitigated by limiting total credit
exposure to individual borrowers or groups of borrowers,
industries, property types and geographic markets, and by
taking collateral where appropriate. The type and amount of
the collateral varies from loan to loan depending on the
financial strength of the borrower, the amount and terms of
the loan, and the collateral available to be pledged by the
borrower. Credit risk in commercial real estate is further
mitigated by requiring the borrowers to have adequate down
payments or equity in the property, thereby limiting the
amount of the loan in relation to the appraised value of
the property.
Credit risk in the commercial and commercial real
estate categories is managed by performing regular periodic
reviews of borrowing relationships over a predetermined
amount subsequent to their origination, verifying each
borrower's compliance with applicable loan covenants, and
monitoring the overall portfolio for levels of
concentration. Risk in the commercial real estate category
is also managed by periodic site visits and inspections of
collateral properties and monitoring the factors in each of
WesBanco's markets that influence real estate collateral
values.
WesBanco maintains a loan grading system that
categorizes commercial and commercial real estate loans
according to their level of credit risk. This grading
system encompasses six categories that define each
borrower's ability to repay their loan obligations and
other factors that affect the quality of each loan. All
commercial loans are assigned a grade at their inception,
and grades are regularly reviewed and evaluated. When the
risk of a loan increases beyond that which is considered
acceptable in the assigned grade, its grade is adjusted to
reflect the change in risk. The loan grading system
provides management with an effective early warning system
of potential problems, assists in identifying adverse
trends and evaluating the overall quality of the portfolio,
and facilitates evaluating the adequacy of the allowance
for loan losses.
WesBanco categorizes commercial and commercial real
estate loans by industry using the North American Industry
Classification System, or NAICS. WesBanco also categorizes
commercial real estate loans by property type. The
commercial and commercial real estate portfolio is not
concentrated in any single industry or property type, but
reflects a broad range of businesses across all sectors of
the economy. Tables 9 and 10 set forth information
pertaining to commercial loans, including those secured by
real estate, by industry sector and commercial real estate
loans by property type.
Table 9. Commercial and Commercial Real Estate Loan
Distribution by Industry
December 31, 2002
-------------------------------------------------------
Largest
Average Balance
Outstanding % of % of Loan To a Single
(dollars in thousands) Balance Total Capital Balance Obligor
=============================================================================
Accommodation $ 70,185 9% 22% $260 $ 6,500
Construction 63,281 8 19 84 5,936
Education 23,099 2 7 537 11,761
Government 22,158 2 7 74 2,431
Healthcare 46,685 6 14 125 5,332
Manufacturing 32,734 4 10 162 2,551
Real estate 218,631 27 67 172 16,180
Retail 102,145 13 31 166 7,094
Services 95,763 12 29 122 8,851
Wholesale 30,937 4 10 138 3,000
Other 105,355 13 32 57 10,434
------------------------------------------------------
Total $ 810,973 100%
=============================================================================
E - 33
Table 10. Commercial Real Estate Loan Distribution by Property Type
December 31, 2002
-------------------------------------------------------
Largest
Average Balance
Outstanding % of % of Loan For a Single
(dollars in thousands) Balance Total Capital Balance Property
=============================================================================
1-to-4 family rentals $ 41,381 8% 13% $ 57 $ 468
Apartment buildings 66,835 13 21 400 7,573
Hotels and motels 25,336 5 8 1,206 6,500
Industrial property 35,140 7 11 338 3,507
Land-improved 21,480 4 7 140 1,206
Land-unimproved 11,165 2 3 107 1,238
Multiple or mixed use 53,971 11 17 457 11,952
Office buildings 64,563 13 20 336 2,663
Retail space 61,542 12 19 303 5,070
Other 123,489 25 38 101 10,434
-----------------------------------------------------
Total $ 504,902 100%
=============================================================================
Commercial and commercial real estate loans are made
to borrowers that are primarily located within WesBanco's
market areas. There are no significant loans to businesses,
or to finance real estate projects located outside
WesBanco's market areas unless the borrower also has
significant other loan, deposit or trust relationships with
WesBanco.
Most commercial and commercial real estate loans are
originated directly by WesBanco. At times, WesBanco may
also purchase or participate in commercial loan
syndications originated by other lending institutions,
including Shared National Credits, which are defined by
banking regulatory agencies as lending arrangements with
three or more participating financial institutions and
credit exceeding $20 million in the aggregate. WesBanco
conducts its own customary credit evaluation before
purchasing or participating in these loans. The risks
associated with syndicated loans are similar to those of
directly originated commercial loans, however, additional
risk may arise from limited ability to control actions of
the syndicate due to WesBanco's limited voting percentage
in the syndicate. Participation in syndicated loan
transactions, including Shared National Credits, totaled
$8.9 million at December 31, 2002 and $9.3 million at
December 31, 2001.
Residential Real Estate: The residential real estate
category consists primarily of mortgage loans to purchase
or refinance personal residences located primarily within
WesBanco's market areas. WesBanco originates conforming and
non-conforming mortgages to be held in its portfolio. Non-
conforming mortgages represent loans that do not meet all
of the documentation standards for sale in the secondary
market. Residential real estate loans have terms ranging up
to 30 years. Interest rates on residential real estate
loans may be fixed for up to 15 years. Fifteen-year fixed
rate residential real estate loans totaled approximately
$142.0 million at December 31, 2002 compared to $125.0
million at December 31, 2001. The remainder of the
portfolio has interest rates that adjust from one to five
years.
Residential real estate loans increased $67.2 million
or 13.4% between December 31, 2001 and December 31, 2002.
This increase is the result of $100.7 million in
residential real estate loans acquired from American net of
a general decrease in the portfolio throughout the year,
which reflected prepayments of both higher fixed rate and
adjustable rate mortgages as customers sought to capitalize
on record low interest rates.
Also included in residential real estate loans are
residential construction loans totaling $11.9 million at
December 31, 2002 and $8.4 million at December 31, 2001.
Residential construction loans are influenced by a number
of factors, including new housing starts and consumer
confidence in the general condition of the economy. This
increase is attributable to an increase in housing starts
despite the general weakness in the economy and stronger
than expected demand for new housing in all of WesBanco's
markets.
Credit risk in the residential real estate category is
mitigated by requiring borrowers to have adequate down
payments or equity in the property, thereby limiting the
amount of the loan in relation to the appraised value of
the property. Loan requests that exceed the loan-to-value
guidelines set forth by credit policy generally must be
supported by private mortgage insurance. Credit risk in
this category is managed by monitoring delinquency levels
and trends, and the factors in each of WesBanco's markets
that influence real estate collateral values. None of
WesBanco's residential real estate loans would be
considered "sub-prime" as that term is commonly used in the
industry.
Home Equity: The home equity category consists of
revolving lines of credit to consumers secured by first or
second liens on residential real estate located primarily
within WesBanco's market areas. Most home equity lines of
credit are available to the borrower as a revolving line of
credit for up to 15 years, at which time the outstanding
balance is required to be repaid over a term of not more
than 7 years. Some home equity lines of credit are
available to the borrower for an indefinite period of time
but may be cancelled by WesBanco under certain circumstances.
E - 34
Financial Condition (continued)
Home equity lines of credit increased $19.6 million or
19.9% between December 31, 2001 and December 31, 2002. This
increase is attributed to approximately $15.0 million of
home equity lines acquired from American and $4.6 million
of growth, as consumers continued to take advantage of
increased equity in their homes and the low interest rate
environment to consolidate debt or obtain cash for other
purposes.
Credit risk in this category is mitigated and
monitored in much the same manner as described for
residential real estate. Home equity lines are generally
limited to an amount in relation to the value of the
property net of the first mortgage, if any. None of
WesBanco's home equity lines of credit would be considered
"sub-prime" as that term is commonly used in the industry.
Consumer: The consumer category consists of installment
loans originated directly by WesBanco and, indirectly
through dealers to finance purchases of automobiles, boats
and other recreational vehicles, and lines of credit used
by consumers that are either unsecured or secured by
collateral other than real estate. Consumer loans are a
homogeneous group of loans, generally smaller in amount,
which spread over a larger number of diverse individual
borrowers. The maximum term for automobile loans and other
installment loans generally does not exceed 72 months.
Consumer lines of credit are generally available for an
indefinite period of time as long as the borrower's credit
characteristics do not materially or adversely change;
however, WesBanco may cancel such lines under certain
circumstances.
Consumer loans decreased $2.1 million or 0.7% between
December 31, 2001 and December 31, 2002. This decrease is
net of approximately $56.0 million of consumer loans
acquired from American, and reflects WesBanco's tightening
of credit standards for indirect automobile lending along
with competition from zero-percent or low interest rates
offered by large domestic automobile manufacturer finance
companies.
Credit risk in the consumer category includes the
impact of a general economic downturn, an isolated adverse
event that impacts a major employer, individual loss of
employment or other personal calamities, and collateral
values that depreciate faster than the repayment of the
loan balance. Credit risk in this category is mitigated by
continuously monitoring delinquency levels and trends,
pursuing collection efforts at the earliest stage of
delinquency, and continually evaluating underwriting
standards to determine to the extent possible those credit
characteristics that predict credit performance. None of
WesBanco's consumer loans would be considered "sub-prime"
as that term is commonly used in the industry.
Loans Held For Sale: The loans held for sale category
consists solely of residential real estate loans originated
for sale in the secondary market. Residential real estate
loans originated for sale in the secondary market decreased
13.8% to $54.8 million in 2002 compared to $63.6 million in
2001, reflecting WesBanco's emphasis on originating
residential real estate loans for its own portfolio to
counter rapidly increasing prepayments. Loans held for sale
decreased $0.8 million or 14.5% between December 31, 2001
and December 31, 2002. Credit risk in this category is
mitigated by entering into sales commitments with secondary
market purchasers of the loans at the time the loans are to
be funded. WesBanco does not service these loans after they
are sold in the secondary market.
Loan Commitments: Loan commitments, which are not reported
on the balance sheet, consist of available balances under
commercial lines of credit, home equity and other consumer
lines of credit, commercial and residential construction
loans, and commercial and standby letters of credit.
Commercial lines of credit and letters of credit are
generally renewable or may be cancelled annually by
WesBanco. Home equity and other consumer lines of credit
are generally available to the borrower beyond one year.
Construction loan commitments are generally available to
the borrower for up to one year but may extend beyond one
year for certain types of projects. All loan commitments
are cancelable by WesBanco regardless of their duration
under certain circumstances.
Table 11. Maturity Distribution of Loan Commitments
December 31, 2002
-------------------------------------------------------
For One One Year to Over
(in thousands) Year or Less Five Years Five Years Total
=============================================================================
Lines of credit:
Commercial $ 97,158 $ 21,182 --- $ 118,340
Commercial real estate 35,080 8,121 --- 43,201
Residential real estate 4,357 --- $ 19 4,376
Home equity 5,143 424 83,671 89,238
Consumer --- --- 6,815 6,815
Letters of credit 24,070 4,401 617 29,088
----------------------------------------------------
Total $ 165,808 $ 34,128 $ 91,122 $ 291,058
=============================================================================
Total commitments to extend credit increased $21.4
million or 7.9% between December 31, 2001 and December 31,
2002. This increase is attributed to loan commitments
acquired from American and growth in home equity and
commercial construction lines of credit, which were
partially offset by reduced demand for commercial lines of
credit.
E - 35
Non-Performing Assets, Impaired Loans and Loans Past Due 90
Days or More: Non-performing assets consist of non-accrual
and renegotiated loans, other real estate owned acquired
through or in lieu of foreclosure and bank premises held
for sale and repossessed automobiles acquired to satisfy
defaulted consumer loans. Other impaired loans include
certain loans that are internally classified as substandard
or doubtful.
Except for certain consumer and residential real
estate loans as discussed in the Notes to the Consolidated
Financial Statements, loans are placed on non-accrual
status when they become past due 90 days or more unless the
loans are both well secured and in the process of
collection. When a loan is placed on non-accrual, interest
income may not be recognized as cash payments are received.
Non-accrual loans increased $3.5 million or 85.6% between
December 31, 2001 and December 31, 2002. This increase is
the result of $2.0 million of non-accrual loans acquired
from American and the reclassification of a $1.3 million
commercial real estate loan that was classified as
renegotiated at December 31, 2001.
Loans are categorized as renegotiated when WesBanco,
for credit or legal reasons related to a borrower's
financial difficulties, grants a concession to the borrower
that it would not otherwise consider. Concessions that may
be granted include a reduction of the interest rate, the
amount of accrued interest, or the face amount of the loan,
as well as an extension of the maturity date or the
amortization schedule. Renegotiated loans decreased $1.1
million or 29.6% between December 31, 2001 and December 31,
2002. This decrease resulted from the partial write-down
and transfer to non-accrual of a commercial real estate
loan referred to above, net of a $1.6 million commercial
real estate loan that was renegotiated in 2002.
Other real estate owned and repossessed assets
increased $1.0 million or 31.0% between December 31, 2001
and December 31, 2002. Other real estate owned acquired
through or in lieu of foreclosure declined due to
aggressive marketing of foreclosed properties throughout
the year. Repossessed assets increased as defaults on
consumer automobile loans rose sharply during the year.
Other impaired loans increased $4.9 million or 77.0%
between December 31, 2001 and December 31, 2002. This
increase is attributed to loans acquired from American and
economic weakness that has caused financial stress among
business borrowers generally.
Loans past due 90 days or more and still accruing
interest increased $1.5 million or 14.7% between December
31, 2001 and December 31, 2002, reflecting higher
delinquency in residential real estate loans and smaller
balance commercial loans. Certain loans in this category
may also be included in other impaired loans.
Table 12. Non-performing Assets, Other Impaired Loans and
Loans Past Due 90 Days or More
December 31,
-----------------------------------------------
(dollars in thousands) 2002 2001 2000 1999 1998
=============================================================================
Non-accrual:
Commercial $ 3,598 $ 2,598 $ 1,048 $ 1,053 $ 4,748
Commercial real estate 3,519 1,258 4,096 2,711 5,391
Residential real estate 301 143 361 358 221
Consumer 62 31 56 36 128
-----------------------------------------------
Total 7,480 4,030 5,561 4,158 10,488
-----------------------------------------------
Renegotiated:
Commercial --- --- --- 783 ---
Commercial real estate 2,633 3,735 381 27 695
Consumer 13 21 36 3 ---
-----------------------------------------------
Total 2,646 3,756 417 813 695
-----------------------------------------------
Total non-performing loans 10,126 7,786 5,978 4,971 11,183
Other real estate owned and
repossessed assets 4,213 3,215 3,424 3,512 3,486
-----------------------------------------------
Total non-performing assets 14,339 11,001 9,402 8,483 14,669
-----------------------------------------------
Other impaired loans:
Commercial 6,965 2,230 4,060 2,577 1,075
Commercial real estate 4,284 4,125 7,453 6,129 4,210
-----------------------------------------------
Total other impaired loans 11,249 6,355 11,513 8,706 5,285
-----------------------------------------------
Total non-performing assets
and other impaired loans $25,588 $17,356 $20,915 $17,189 $19,954
===============================================
Percentage of non-performing
assets to total loans
outstanding and other real
estate owned 0.79% 0.71% 0.59% 0.56% 1.07%
-----------------------------------------------
Percentage of non-performing
loans and other impaired
loans to loans outstanding 1.17% 0.92% 1.10% 0.90% 1.20%
-----------------------------------------------
Past due 90 days or more:
Commercial $ 1,460 $ 720 $ 1,164 $ 547 $ 3,050
Commercial real estate 3,766 1,469 1,542 2,629 1,267
Residential real estate 4,688 4,206 1,984 1,545 1,453
Home equity 344 490 148 92 ---
Consumer 1,847 3,611 1,743 1,219 1,184
-----------------------------------------------
Total past due 90 days
or more $ 12,105 $ 10,496 $ 6,581 $ 6,032 $ 6,954
=============================================================================
E - 36
Financial Condition (continued)
Allowance for Loan Losses: The allowance for loan losses
represents management's estimate of probable losses
inherent in the loan portfolio. The allowance is reduced by
charge-offs, net of recoveries, and increased by charging a
provision to operations to maintain the allowance at the
level determined appropriate by management.
Management evaluates the adequacy of the allowance at
least quarterly, which includes testing certain individual
loans as well as collective pools of loans for impairment.
This evaluation includes an assessment of actual loss
experience within each category of the portfolio,
individual commercial and commercial real estate loans that
exhibit credit weakness; current economic events, including
employment statistics, trends in bankruptcy filings, and
other pertinent factors; industry or geographic
concentrations, and regulatory guidance. Allocations of the
allowance are made for loans in each category of the
portfolio that are not specifically reserved based on
historical loss rates with appropriate adjustments to
reflect changing economic conditions, delinquency and non-
performing loan trends, and other relevant factors.
Allocations based on historical loss rates for commercial
and commercial real estate loans are derived from a
migration analysis, which computes losses sustained on
loans according to their internal risk grade. Specific
reserves are established for individual commercial and
commercial real estate loans that are deemed impaired
pursuant to SFAS No. 114. The determination of specific
reserves takes into consideration anticipated future cash
flows available to pay the loan and/or the estimated
realizable value of collateral, if any. Management relies
on observable data from internal and external sources to
evaluate each of these factors, adjust assumptions and
recognize changing conditions to reduce differences between
estimated and actual observed losses from period to period.
Table 13. Allowance for Loan Losses
For the years ended December 31,
-------------------------------------------
(dollars in thousands) 2002 2001 2000 1999 1998
===========================================================================================
Beginning balance - Allowance for loan losses $20,786 $20,030 $19,752 $19,098 $20,261
Allowance for loan losses of
acquired (sold) banks - net 3,903 --- --- 192 (37)
Allowance for loan losses
allocated to (sold) credit cards --- --- --- (450) ---
Provision for loan losses 9,359 5,995 3,225 4,295 4,392
Charge-offs:
Commercial 1,888 1,389 806 1,890 1,443
Commercial real estate 2,207 793 668 134 490
Residential real estate 328 352 137 204 515
Home equity 172 36 39 --- ---
Consumer 5,121 3,268 2,445 2,490 3,952
-------------------------------------------
Total charge-offs 9,716 5,838 4,095 4,718 6,400
-------------------------------------------
Recoveries:
Commercial 243 49 314 457 405
Commercial real estate 37 149 34 22 117
Residential real estate 86 17 29 64 39
Home equity 2 --- --- --- ---
Consumer 380 384 771 792 321
-------------------------------------------
Total recoveries 748 599 1,148 1,335 882
-------------------------------------------
Net charge-offs 8,968 5,239 2,947 3,383 5,518
-------------------------------------------
Ending balance - Allowance for loan losses $25,080 $20,786 $20,030 $19,752 $19,098
===========================================
Ratio of net charge-offs to average loans:
Commercial 0.55% 0.50% 0.22% 0.75% 0.54%
Commercial real estate 0.45 0.20 0.19 0.03 0.12
Residential real estate 0.04 0.06 0.02 0.03 0.10
Home equity 0.14 0.04 0.05 --- ---
Consumer 1.42 0.84 0.48 0.51 1.11
-------------------------------------------
Total 0.50% 0.34% 0.19% 0.23% 0.41%
===========================================
Ratio of the allowance to total loans 1.38% 1.35% 1.26% 1.30% 1.39%
===========================================================================================
The allowance increased $4.3 million or 20.7% between
December 31, 2001 and December 31, 2002 and represented
1.38% of total loans at December 31, 2002 compared to 1.35%
at December 31, 2001. In addition to the increase in loans
acquired from American, the allowance was also increased to
reflect increased delinquency in all categories of the
portfolio, increased levels of non-performing commercial
and commercial real estate loans, rising consumer and
commercial loan losses, and continued uncertainty in the
economy.
Net charge-offs increased $3.7 million or 71.2%
between December 31, 2001 and December 31, 2002. This
increase reflects a $1.3 million write-down of a commercial
real estate loan, higher losses on small business loans
that were adversely impacted by the economic downturn,
higher losses on consumer loans attributed to an increase
in personal bankrupt-
E - 37
cies, and the overall increase in the portfolio for loans
acquired from American. Net charge-offs as percentage of
average loans rose to 0.50% for 2002 compared to 0.34% for
2001, which is consistent with or below the average for
WesBanco's peers based on available peer group data.
The allocation to the commercial category increased
$2.5 million or 36.0% between December 31, 2001 and
December 31, 2002. The allocation to the commercial real
estate category increased $0.6 million or 7.4% between
December 31, 2001 and December 31, 2002. Adjusted for the
$1.3 million write-down of one loan as previously
discussed, which amount was allocated at December 31, 2001,
the allocation to the commercial real estate category
increased $1.9 million or 27.5%. These increases are
consistent with increased levels of non-performing and
impaired loans, more conservative assumptions about future
cash flows and the values of collateral when determining
specific reserves on individual impaired loans, and the
general increase in the portfolios from American. The
allocations to these two categories did not increase in
direct proportion to the respective increase in loans
outstanding in each category because of the added
protection afforded by the collateral for commercial real
estate loans compared to commercial loans. Even though
consumer loans decreased overall, the allocation to the
consumer category increased $1.0 million or 20.8% between
December 31, 2001 and December 31, 2002 primarily due to
increased loss rates, personal bankruptcies and an
increasing trend of defaults by borrowers with otherwise
satisfactory credit characteristics at the time of default.
Table 14. Allocation of the Allowance for Loan Losses
December 31,
--------------------------------------------
(in thousands) 2002 2001 2000 1999 1998
=============================================================================
Commercial $ 9,473 $ 6,963 $ 7,418 $ 7,519 $ 6,845
Commercial real estate 9,046 8,421 8,437 8,273 7,084
Residential real estate 800 680 731 723 591
Home equity 106 59 154 26 20
Consumer 5,655 4,663 3,290 3,211 4,558
--------------------------------------------
Total allowance for loan losses $25,080 $20,786 $20,030 $19,752 $19,098
=============================================================================
Although WesBanco has improved its migration and other
loss prediction models to enhance the accuracy of
estimating probable losses, higher allocations for all loan
categories also reflects estimated probable but undetected
losses due to the inherent imprecision in loss estimation
models or techniques.
Management believes the allowance for loan losses is
sufficient to absorb probable losses. However, future
adjustments to the allowance may be necessary due to
changes in economic conditions, loss rates, and other
portfolio trends.
Deposits
Deposits, WesBanco's primary source of funds,
increased $486.5 million or 25.4% between December 31, 2001
and December 31, 2002 the majority of which was related to
American. Deposit growth for the year ended December 31,
2002, compared to the corresponding period in 2001,
consisted of deposits acquired from American as well as
increases in money market deposit accounts and interest
bearing demand deposits.
[GRAPH]
(in millions) Deposits
-------------------
1998 $ 1,788
1999 $ 1,814
2000 $ 1,870
2001 $ 1,913
2002 $ 2,400
For 2002, non-interest bearing demand deposits
increased $56.8 million or 23.3%, money market accounts
increased $101.3 million or 24.9%, and interest bearing
demand deposits increased by $30.7 million or 12.5%. As
interest rates fell during 2002, customers shifted balances
out of certificates of deposits and savings account
products in favor of competitively priced short-term money
market products. The interest rate paid on interest bearing
deposits decreased from an average of 4.02% in 2001 to
2.80% in 2002.
Table 15. Maturity Distribution of Certificates of Deposit $100,000 or More
December 31,
------------------------
(in thousands) 2002 2001
=============================================================================
Maturity:
Under three months $ 36,818 $ 34,484
Three to six months 33,936 25,687
Six to twelve months 35,495 33,006
Over twelve months 108,369 68,459
------------------------
Total $ 214,618 $ 161,636
=============================================================================
Interest expense on certificates of deposit of $100,000 or more was
approximately $7,443 in 2002, $7,485 in 2001 and $6,335 in 2000.
E - 38
Financial Condition (continued)
Borrowings
FHLB borrowings increased $236.4 million or 221.2% for
the year ended December 31, 2002, with $150.0 million of
the increase attributable to the American transaction.
During 2002, WesBanco added FHLB borrowings of $86.4
million, utilizing the proceeds to purchase Federal agency
and tax-exempt securities. As of December 31, 2002,
WesBanco had $343.3 million outstanding in FHLB borrowings
with a weighted average interest rate of 4.21%. WesBanco
uses FHLB borrowings to lengthen maturities of shorter-term
borrowings in the current low interest rate environment and
to purchase securities when advantageous yield spread
opportunities arise.
Other borrowings, which include, federal funds
purchased, securities sold under repurchase agreements,
treasury tax and loan notes, and a revolving line of credit
increased $3.4 million or 2.0% during 2002. WesBanco
utilized the proceeds from the additional other borrowings
to maintain adequate balance sheet liquidity.
Capital Resources
Shareholders' equity increased to $325.2 million at
December 31, 2002 from $258.2 million at December 31, 2001.
The increase was primarily due to the issuance of treasury
stock used in the American acquisition.
In accordance with the board of directors approved
stock repurchase plans, WesBanco purchased treasury stock
totaling 928,201 shares during 2002. As of December 31,
2002, 491,401 shares of WesBanco common stock remained
authorized to be purchased under the current one million-
share stock repurchase plan, which began on June 20, 2002.
The shares are purchased for general corporate purposes,
which may include potential acquisitions, dividend
reinvestment and employee benefit plans. The timing, price
and quantity of purchases are at the discretion of WesBanco
and the plan may be discontinued or suspended at any time.
[GRAPH]
Return on Equity
----------------
1998 9.55%
1999 9.85%
2000 10.42%
2001 11.28%
2002 10.95%
Strong and consistent earnings coupled with a high
level of capital have enabled WesBanco to continue to
increase dividends per share. Effective with the second
quarter of 2002, WesBanco increased its quarterly dividend
per share 2.2% to $0.235 from $0.23. For 2002, dividends
increased to $0.935 per share compared to $0.92 per share
in the prior year. This dividend increase represented the
seventeenth consecutive year of dividend increases at
WesBanco. The 2002 dividend per share payout ratio was
55.0%.
WesBanco is subject to risk-based capital guidelines
that measure capital relative to risk-weighted assets and
off-balance sheet instruments. WesBanco, and its banking
subsidiary, maintain Tier 1, Total Capital and Leverage
ratios well above minimum regulatory levels. See Note 19 of
the Consolidated Financial Statements for more information
on capital amounts, ratios and minimum regulatory
requirements.
Market and Liquidity Risk
The primary objective of WesBanco's asset/liability
management function is to maximize net interest income
within established policy parameters. This objective is
accomplished through the management of balance sheet
composition, market risk exposures arising from changing
economic conditions, and liquidity risk.
Market Risk: Market risk is defined as the risk of loss
due to adverse changes in the fair value of financial
instruments resulting from fluctuations in interest rates
and equity prices. Management considers interest rate risk
WesBanco's most significant market risk. Interest rate risk
is the exposure to adverse changes in net interest income
due to changes in interest rates. Consistency of WesBanco's
net interest income is largely dependent on effective
management of interest rate risk. As interest rates change
in the market, rates earned on interest rate sensitive
assets and rates paid on interest rate sensitive
liabilities do not necessarily move concurrently. Differing
rate sensitivities may arise because fixed rate assets and
liabilities may not have the same maturities or because
variable rate assets and liabilities differ in the timing
and/or the percentage of rate changes.
WesBanco's Asset/Liability Management Committee
("ALCO"), comprised of senior management, monitors and
manages interest rate risk within Board approved policy
limits. Interest rate risk is monitored primarily through
the use of an earnings simulation model. The model is
highly dependent on assumptions, which change regularly as
the balance sheet and interest rates change. The key
assumptions and strategies employed are analyzed regularly
and reviewed by ALCO.
The earnings simulation model projects changes in net
interest income resulting from the effect of changes in
interest rates. The model requires projections from
management on how the balance sheet may change over time
given different interest rate assumptions. Loan and deposit
growth assumptions along with yields and rates on new loans
and deposits are derived from management forecasts and
historical analysis. Mortgage loan prepayment speeds are
derived from industry guidelines and historical prepayment
experience. Non-time deposit growth and rate assumptions
are based on historical patterns. Securities portfolio
maturities and prepayments are assumed to be reinvested in
similar instruments and callable bond forecasts are
adjusted at varying levels of interest rates.
E - 39
Interest rate risk policy limits are determined by
measuring the anticipated change in net interest income
over a 12-month period assuming an immediate and sustained
200 basis point increase or decrease in market interest
rates compared to a stable rate model. WesBanco's current
policy limits this exposure to +/- 5.0% of net interest
income for a 12-month period. Table 16 shows WesBanco's
interest rate sensitivity at December 31, 2002 and 2001
assuming both a 200 and 100 basis point interest rate
change, compared to a stable-rate model. Since management
believes that a 200 basis point decline in market interest
rates is unlikely, an alternative 100 basis point change
was evaluated by ALCO. The earnings simulation model
projects net interest income for the next 12-month period
would decrease by approximately 1.1% if interest rates were
to rise immediately by 200 basis points. Net interest
income would decline by approximately 0.1% if interest
rates were to decline by 100 basis points. Since the
assumptions used in modeling changes in interest rates are
uncertain, the simulation analysis should not be relied
upon as being indicative of actual results. The analysis
may not consider all actions that WesBanco could employ in
response to changes in interest rates.
Table 16. Net Interest Income Sensitivity
Percentage Change in
Change in Net Interest Income
Interest Rates ---------------------------------------- ALCO
(basis points) December 31, 2002 December 31, 2001 Guidelines
- --------------------------------------------------------------------------
+200 -1.10% 0.4% +/- 5.0%
-200 N/A -5.4% +/- 5.0%
+100 0.02% 1.6% N/A
-100 -0.10% -1.6% N/A
==========================================================================
Another method that WesBanco uses to manage its interest
rate risk is a rate sensitivity gap analysis shown in Table
17. Gap analysis measures the maturity and repricing
relationships between rate sensitive assets and rate
sensitive liabilities at a specific point in time.
Table 17. Interest Rate Sensitivity - GAP Analysis
December 31, 2002
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Under Three Six Nine Over
Three To Six To Nine Months To One
(in thousands) Months Months Months One Year Year Total
- ----------------------------------------------------------------------------------------------------------
Rate Sensitive Assets
Due from banks/interest bearing $ 984 --- --- --- --- $ 984
Securities (1) 43,401 $ 30,459 $ 33,632 $ 16,361 $1,052,898 1,176,751
Loans 468,989 162,718 164,191 164,949 860,038 1,820,885
----------------------------------------------------------------------
Total rate sensitive assets 513,374 193,177 197,823 181,310 1,912,936 2,998,620
----------------------------------------------------------------------
Rate Sensitive Liabilities
Money market deposit accounts 400,444 2,933 2,966 2,998 98,721 508,062
Savings and NOW accounts 15,009 15,049 15,089 15,165 573,109 633,421
Certificates of deposit 162,942 188,504 111,882 66,520 427,363 957,211
Federal funds purchased 19,000 --- --- --- --- 19,000
Federal Home Loan Bank Borrowings 10,050 25,050 50,050 50 258,124 343,324
Other borrowings 142,154 7,536 2,738 2,221 1,985 156,634
Company obligated mandatory
redeemable capital securities of
subsidiary trusts holding solely
debentures of the Corporation --- --- --- --- 12,650 12,650
----------------------------------------------------------------------
Total rate sensitive liabilities 749,599 239,072 182,725 86,954 1,371,952 2,630,302
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Interest rate sensitivity gap $(236,225) $ (45,895) $ 15,098 $ 94,356 $ 540,984 $ 368,318
---------------------------------------------------------------------
Cumulative interest rate
sensitivity gap $(236,225) $(282,120) $(267,022) $(172,666) $ 368,318 ---
==========================================================================================================
(1) Securities are categorized above by expected maturity at amortized cost.
As shown in Table 17, the liability sensitive gap
position in the under three month time horizon is primarily
the result of continued growth in WesBanco's prime rate
money market deposit product. Interest rates on these
deposits change in relation to WesBanco's base lending
rate. Other factors contributing to the short-term
liability sensitive gap position include growth in $100,000
and over certificates of deposit and short-term borrowings.
The interest rate sensitivity of savings and NOW accounts
is based on historical trends analyzed over the past two
years.
WesBanco's ALCO evaluates various strategies to reduce
the exposure to interest rate fluctuations. These
strategies, at December 31, 2002, emphasize increasing
asset sensitivity in anticipation of rising interest rates.
Among the strategies evaluated is the continued utilization
of interest rate swap agreements. At December 31, 2002,
interest rate swap agreements with notional values totaling
$110.5 million were used to effectively convert a portion
of prime rate money market deposits to a fixed-rate basis.
Other strategies evaluated by ALCO include managing the
level of residential real estate loans through sales of
long-term fixed rate real estate loans to the secondary
market, shortening maturities in the securities portfolio
and emphasizing growth in long-term certificate of deposit
products.
E - 40
Market and Liquidity Risk (continued)
Liquidity Risk: Liquidity is defined as the degree of
readiness to convert assets into cash with minimum loss.
Liquidity risk is managed through WesBanco's ability to
provide adequate funds to meet changes in loan demand,
unexpected outflows in deposits and other borrowings as
well as to take advantage of market opportunities and meet
operating cash needs. This is accomplished by maintaining
liquid assets in the form of securities, sufficient
borrowing capacity and a stable core deposit base.
Liquidity is centrally monitored by WesBanco's ALCO.
WesBanco determines the degree of required liquidity
by the relationship of total holdings of liquid assets to
the possible need for funds to meet unexpected deposit
losses and/or loan demands. The ability to quickly convert
assets to cash at a minimal loss is a primary function of
WesBanco's investment portfolio management. Federal funds
sold, commercial paper, U.S. Treasury and Federal Agency
Securities maturing within three months, and money market
mutual funds are classified as secondary reserve assets.
These secondary reserve assets, combined with the cash flow
from the loan portfolio and the remaining sectors of the
investment portfolio, and other sources, adequately meet
the liquidity requirements of WesBanco.
Securities are the principal source of asset-funded
liquidity. At December 31, 2002, WesBanco had approximately
$123.9 million in securities scheduled to mature within one
year compared to $32.7 million in the prior year.
Additional asset-funded liquidity is provided by the
remainder of the available for sale securities portfolio,
cash and cash equivalents. During December 2002, WesBanco
utilized proceeds from the sale of securities to purchase
approximately $40 million in bank owned life insurance.
In addition to the securities portfolio, WesBanco's
banking subsidiary maintains a line of credit with the FHLB
as an additional funding source. Available lines of credit
at December 31, 2002 and December 31, 2001 approximated
$589.4 million and $551.8 million, respectively. At
December 31, 2002, WesBanco had $779.5 million of unpledged
securities that could be used for collateral or sold.
The principal source of parent company liquidity is
dividends from WesBanco's banking subsidiary. There are
legal limitations on the ability of WesBanco Bank, Inc.,
WesBanco's banking subsidiary, to pay a dividend to the
parent company. See Note 19 of the Consolidated Financial
Statements for more information on dividend restrictions
between the Parent Company and WesBanco Bank, Inc.
Additional Parent Company liquidity is provided by the
Parent's security portfolio as well as available lines
of credit with a commercial bank and WesBanco Bank, Inc.
totaling $9.8 million at December 31, 2002.
At December 31, 2002, WesBanco had outstanding
commitments to extend credit in the ordinary course of
business approximating $262.0 million compared to $251.4
million at the end of the prior year. On a historical
basis, only a small portion of these commitments will
result in an outflow of funds. WesBanco also has planned
additions to fixed assets of approximately $2.0 million
during 2003.
Management believes WesBanco has sufficient liquidity
to meet current obligations to borrowers, depositors and
others.
Comparison of 2001 Versus 2000
Net income for 2001 was $29.0 million or $1.60 per
share compared to $26.9 million or $1.41 per share in 2000.
Core earnings per share increased 12.3% to $1.64 for the
year ended December 31, 2001 compared to $1.46 for 2000.
Core earnings, which excludes amortization of goodwill, tax
effected net securities gains and merger-related expenses,
increased 6.4% to $29.7 million for 2001 compared to $28.0
million for 2000.
Taxable equivalent net interest income increased $4.8
million or 5.4% from 2000 to 2001. The net interest margin
increased to 4.17% in 2001 compared to 4.14% in 2000, while
average earning assets increased $104.1 million or 4.9%
during 2001. The overall decline in interest rates during
2001 and the short-term interest rate sensitivity of
interest bearing liabilities favorably impacted WesBanco's
taxable net interest margin. Taxable equivalent interest
income increased $1.6 million or 0.9% for 2001 compared to
2000. The increase was due to increases in average
securities volume, partially offset by decreases in yields
on loans and securities. Interest expense decreased $3.2
million or 4.0% from 2000. The decrease resulted from a
decline in rates paid on average interest bearing
liabilities to 4.03% from 4.43% which was partially offset
by average volume increases of 5.5%.
The provision for loan losses was $6.0 million in 2001
compared to $3.2 million in 2000. Net charge-offs for 2001
increased 77.8% to $5.2 million compared to $2.9 million
for 2000. The increases in the provision and net charge-
offs were primarily the result of a downturn in the
regional economy.
Non-interest income for 2001, excluding net securities
gains, increased 3.2% to $23.3 million compared to $22.6
million for 2000. Trust revenue decreased $0.7 million or
5.9%. The decline was primarily due to a general reduction
in the market value of trust assets and lower estate
settlement income. Deposit activity charges increased $1.1
million or 13.4% primarily as the result of increased
overdraft income and increased ATM interchange income.
Non-interest expense for 2001 increased $0.4 million
to $64.9 million compared to $64.5 million for 2000. During
2001, WesBanco successfully controlled total operating
expenses, resulting in a less than 1% increase over the
2000 level.
E - 41